form10q.htm
As filed with the Securities and Exchange Commission on August 2, 2010

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Oklahoma
 
73-1373454
(State or other jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
   
Bank of Oklahoma Tower
   
P.O. Box 2300
   
Tulsa, Oklahoma
 
74192
(Address of Principal Executive Offices)
 
(Zip Code)
 
(918) 588-6000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  x  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  x                                                                                                                  Accelerated filer  ¨                                                                                                 Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ¨  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,080,797 shares of common stock ($.00006 par value) as of June 30, 2010.
 

 
 

 

BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2010

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
3
Market Risk (Item 3)                                                                                              
47
Controls and Procedures (Item 4)
48
Consolidated Financial Statements – Unaudited (Item 1)
50
Six Month Financial Summary – Unaudited (Item 2)
82
Quarterly Financial Summary – Unaudited (Item 2)
83
Quarterly Earnings Trend – Unaudited
85
   
Part II.  Other Information
 
Item 1.  Legal Proceedings
86
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
86
Item 6.  Exhibits
86
Signatures
87


 
 

 

 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $63.5 million or $0.93 per diluted share for the second quarter of 2010, compared to $60.1 million or $0.88 per diluted share for the first quarter of 2010 and $52.1 million or $0.77 per share for the second quarter of 2009.  Net income for the six months ended June 30, 2010 totaled $123.7 million or $1.81 per diluted share compared with net income of $107.1 million or $1.58 per diluted share for the six months ended June 30, 2009.

Net income for the first quarter of 2010 included a $6.5 million or $0.10 per diluted share day-one gain from the purchase of the rights to service $4.2 billion of residential mortgage loans on favorable terms.  Net income for the second quarter of 2009, included a $7.7 million or $0.11 per share special assessment by the Federal Deposit Insurance Corporation (“FDIC”).

Highlights of the second quarter of 2010 included:

·  
Net interest revenue totaled $182.1 million compared to $175.6 million for the second quarter of 2009 and $182.6 million for the first quarter of 2010.  Net interest margin was 3.63% for the second quarter of 2010, 3.55% for the second quarter of 2009 and 3.68% for the first quarter of 2010.  Average earning assets increased $149 million compared to the second quarter of 2009 and decreased $40 million compared to the first quarter of 2010.

·  
Fees and commissions revenue totaled $128.2 million for the second quarter of 2010, up $5.1 million over the second quarter of 2009 and up $12.9 million over the previous quarter.  Brokerage and trading revenue increased $3.0 million over the second quarter of 2009, partially offset by a decline of $1.5 million in mortgage banking revenue.  Trust fees and commissions, transaction card revenue and deposit service charges and fees all increased over the second quarter of 2009.  Brokerage and trading revenue increased $3.7 million, mortgage banking revenue increased $3.5 million and transaction card revenue increased $2.6 million over the prior quarter.  Deposit service charges and trust fees and commissions also increased over the prior quarter.

·  
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $186.5 million, up $2.8 million over the second quarter of the prior year and up $8.8 million from the prior quarter.  Net losses and operating expenses on repossessed assets increased $12.1 million over the second quarter of 2009, partially offset by the impact of the FDIC special assessment of $11.8 million.  Net losses and operating expenses of repossessed assets increased $5.8 million over the prior quarter.

·  
Combined reserves for credit losses totaled $315 million or 2.89% of outstanding loans at June 30, 2010 and $314 million or 2.86% of outstanding loans at March 31, 2010.  Net loans charged off and provision for credit losses were $35.6 million and $36.0 million, respectively, for the second quarter of 2010 compared to $34.9 million and $47.1 million, respectively for the second quarter of 2009 and $34.5 million and $42.1 million, respectively, for the first quarter of 2010.

·  
Nonperforming assets totaled $461 million or 4.19% of outstanding loans and repossessed assets at June 30, 2010, down from $483 million or 4.36% of outstanding loans and repossessed assets at March 31, 2010.  Newly identified nonaccruing loans totaled $58 million for the second quarter of 2010 and $81 million for the first quarter of 2010.

·  
Available for sale securities totaled $9.2 billion at June 30, 2010, up $322 million since March 31, 2010.  Other-than-temporary impairment charges on certain privately-issued residential mortgage backed securities reduced pre-tax income by $2.6 million during the second quarter of 2010, $279 thousand in the second quarter of 2009 and $4.2 million during the first quarter of 2010.


 
- 3 -

 

·  
Outstanding loan balances were $10.9 billion at June 30, 2010, down $89 million since March 31, 2010.  Commercial real estate loans decreased $103 million.  The outstanding balance of commercial loans and unfunded commercial loan commitments were largely unchanged for the quarter.

·  
Total period-end deposits increased $560 million during the second quarter of 2010 to $16.1 billion.  Growth in interest-bearing transaction and demand deposits were offset by a decrease in higher-costing time deposits.

·  
Tangible common equity ratio increased to 8.88% at June 30, 2010 from 8.46% at March 31, 2010 largely due to retained earnings growth.  The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders’ equity as defined by generally accepted accounting principles in the United States of America minus intangible assets and equity that does not benefit common shareholders such as preferred equity and equity provided by the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program.  BOK Financial chose not to participate in the TARP Capital Purchase Program.  The Company and each of its subsidiary banks exceeded the regulatory definition of well capitalized.  The Company’s Tier 1 capital ratios as defined by banking regulations were 11.90% at June 30, 2010 and 11.45% at March 31, 2010.

·  
The Company paid a cash dividend of $16.8 million or $0.25 per common share during the second quarter of 2010.  On July 27, 2010, the board of directors declared a cash dividend of $0.25 per common share payable on or about August 27, 2010 to shareholders of record as of August 13, 2010.


Results of Operations

Net Interest Revenue and Net Interest Margin

Net interest revenue totaled $182.1 million for the second quarter of 2010, up $6.5 million or 4% over the second quarter of 2009 and down $461 thousand compared to the first quarter of 2010.  The increase in net interest revenue compared to the second quarter of 2009 was due primarily to an 8 basis point improvement in net interest margin.  The decrease in net interest revenue from the first quarter of 2010 was due primarily to a 5 basis point decrease in net interest margin.  In addition, average earning assets were up over the second quarter of 2009, but down from the first quarter of 2010.

Average earning assets for the second quarter of 2010 increased $149 million or 1% compared to the second quarter of 2009.  Average available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $1.8 billion.  We purchased these securities to supplement earnings, especially in a period of declining loan demand, and to manage interest rate risk.  Average loans, net of allowances for loan losses, decreased $1.5 billion compared to the second quarter of 2009.   All major loan categories decreased largely due to reduced customer demand and normal repayment trends.  In addition, average balances of trading securities and residential mortgage loans held for sale were lower in the second quarter of 2010.

Growth in average earning assets was funded by a $505 million increase in average deposits.  Demand deposits for the second quarter of 2010 were up $478 million over the second quarter of 2009.  In addition, interest-bearing transaction accounts increased $1.4 billion over the second quarter of 2009.  Time deposits decreased $1.4 billion compared with the second quarter of 2009 as we continued to decrease brokered deposits and other higher costing time deposits.  Borrowed funds decreased $158 million compared to the second quarter of 2009.

Average earning assets decreased $40 million compared to the previous quarter.  Securities increased $155 million.  Growth in securities was due to a $79 million increase in investment securities and a $69 million increase in mortgage trading securities.  Residential mortgage loans held for sale increased $46 million.  Outstanding loans, net of allowance for loan losses, decreased $219 million.  Commercial, commercial real estate and consumer loan categories decreased in the second quarter of 2010.  Residential mortgage loans increased $15 million over the first quarter of 2010.  Deposits increased $441 million compared with the previous quarter, including a $324 million increase in interest-bearing transaction accounts and  a $175 million increase in demand deposits, partially offset by a $71 million decrease in higher-costing time deposits.  Borrowed funds decreased $714 million compared to the previous quarter.


 
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Net interest margin was 3.63% for the second quarter of 2010, 3.55% for the second quarter of 2009 and 3.68% for the first quarter of 2010.

The increase in net interest margin over the second quarter of 2009 was due primarily to lower funding costs.  The cost of interest-bearing liabilities was 0.85% for the second quarter of 2010, down 46 basis points from the second quarter of 2009.  The yield on earning assets dropped 32 basis points over these same periods.

The tax-equivalent yield on earning assets was 4.33% for the second quarter of 2010, down 32 basis points from the second quarter of 2009.  Securities portfolio yields were down 94 basis points.  Our securities re-price as cash flow received is reinvested at current market rates.  The resulting change in yield on the securities portfolio occurs more slowly and may not immediately move in the same direction as changes in market rates.  The decrease in securities portfolio yields was partially offset by growth in loan yields.  Loan yields increased 19 basis points to 4.83%.  Funding costs were down 46 basis points from the second quarter of 2009.  The cost of interest-bearing deposits decreased 62 basis points and the cost of other borrowed funds decreased 4 basis points.

The tax-equivalent yield on earning assets for the second quarter of 2010 was down 8 basis points from the first quarter of 2010.  Yield on the securities portfolio dropped by 18 basis points due primarily to reinvestment of cash flows at current rates. Loan portfolio yields were up 2 basis points.  The cost of interest-bearing liabilities was down 2 basis points from the previous quarter.

The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 15 basis points for the second quarter of 2010 compared with 21 basis points in the second quarter of 2009 and 14 basis points in the preceding quarter.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report.  Approximately two-thirds of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year.  These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans.  The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities.  Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed-rate, residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities.  The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio.  To the extent that intermediate and longer term interest rates remain at extremely low levels, mortgage-related security prepayments may accelerate putting additional downward pressure on the securities portfolio yield and on net interest margin.  We also use derivative instruments to manage our interest rate risk.  Interest rate swaps with a combined notional amount of $30 million convert fixed rate liabilities to floating rate based on LIBOR.  Net interest revenue increased $1.0 million for the second quarter of 2010, $4.6 million in the second quarter of 2009 and $658 thousand in the first quarter of 2010 from periodic settlements of these contracts.  This increase in net interest revenue contributed 2 basis points to net interest margin in the second quarter of 2010, 9 basis points in the second quarter of 2009 and 1 basis point in the first quarter of 2010.  Derivative contracts are carried on the balance sheet at fair value.  Changes in fair value of these contracts are reported in income as derivatives gains or losses in the Consolidated Statements of Earnings.


 
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The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.

Table 1 – Volume / Rate Analysis
                       
(in thousands)
                       
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2010 / 2009
   
June 30, 2010 / 2009
 
 
       
Change Due To (1)
         
Change Due To (1)
 
               
Yield /
               
Yield
 
   
Change
   
Volume
   
Rate
   
Change
   
Volume
   
/Rate
 
Tax-equivalent interest revenue:
                                   
  Securities
  $ 319     $ 19,946     $ (19,627 )   $ (1,375 )   $ 173,475     $ (174,850 )
  Trading securities
    (322 )     (541 )     219       (549 )     (3,055 )     2,506  
  Loans
    (12,544 )     (14,889 )     2,345       (24,147 )     (114,725 )     90,578  
  Funds sold and resell agreements
    (6 )     (3 )     (3 )     (28 )     1       (29 )
Total
    (12,553 )     4,513       (17,066 )     (26,099 )     55,696       (81,795 )
Interest expense:
                                               
  Transaction deposits
    (3,318 )     2,265       (5,583 )     (8,600 )     32,330       (40,930 )
  Savings deposits
    81       13       68       150       (135 )     285  
  Time deposits
    (15,574 )     (7,478 )     (8,096 )     (34,671 )     (11,198 )     (23,473 )
  Federal funds purchased and repurchase    agreements
    259       154       105       (544 )     1,535       (2,079 )
  Other borrowings
    (972 )     (346 )     (626 )     (2,445 )     2,710       (5,155 )
  Subordinated debentures
    (97 )     1       (98 )     (97 )     164       (261 )
Total
    (19,621 )     (5,391 )     (14,230 )     (46,207 )     25,406       (71,613 )
  Tax-equivalent net interest revenue
    7,068       9,904       (2,836 )     20,108       30,290       (10,182 )
Change in tax-equivalent adjustment
    (535 )                     (846 )                
Net interest revenue
  $ 6,533                     $ 19,262                  
 (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.


 
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Other Operating Revenue

Other operating revenue was $157.4 million for the second quarter of 2010 compared to $128.0 million for the second quarter of 2009 and $113.9 million for the first quarter of 2010.   Fees and commissions revenue increased $5.1 million or 4% compared with the second quarter of 2009.  Net gains on securities, derivatives and other assets increased $25.5 million, including an increase of $32.6 million on securities and derivatives held as an economic hedge of mortgage servicing rights.   Other-than-temporary impairment charges recognized in earnings were $1.1 million greater compared to the second quarter of 2009.

Other operating revenue increased $43.6 million compared to the first quarter of 2010.  Fees and commissions revenue increased $12.9 million.  Net gains on securities, derivatives and other assets increased $29.1 million over the first quarter of 2010, including $22.6 million on securities and derivatives held as an economic hedge of mortgage servicing rights.  Other-than-temporary impairment charges recognized in earnings were $1.6 million lower compared with the first quarter of 2010.
 
 
Table 2 – Other Operating Revenue 
                                   
(In thousands)
                                   
   
Three Months Ended
June 30,
   
Increase
   
% Increase
   
Three Months Ended
   
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
March 31, 2010
   
(Decrease)
   
(Decrease)
 
                                           
 Brokerage and trading revenue
  $ 24,754     $ 21,794     $ 2,960       14 %   $ 21,035     $ 3,719       18 %
 Transaction card revenue
    28,263       27,533       730       3 %     25,687       2,576       10 %
 Trust fees and commissions
    17,737       16,860       877       5 %     16,320       1,417       9 %
 Deposit service charges and fees
    28,797       28,421       376       1 %     26,792       2,005       7 %
 Mortgage banking revenue
    18,335       19,882       (1,547 )     (8 )%     14,871       3,464       23 %
 Bank-owned life insurance
    2,908       2,418       490       20 %     2,972       (64 )     (2 )%
 Margin asset fees
    69       68       1       1 %     36       33       92 %
 Other revenue
    7,305       6,124       1,181       19 %     7,602       (297 )     (4 )%
   Total fees and commissions revenue
    128,168       123,100       5,068       4 %     115,315       12,853       11 %
Gain (loss) on other assets
    1,545       973       572       N/A       (1,390 )     2,935       N/A  
Gain (loss) on derivatives, net
    7,272       (1,037 )     8,309       N/A       (341 )     7,613       N/A  
Gain on available for sale securities
    8,469       16,670       (8,201 )     N/A       4,076       4,393       N/A  
Gain (loss) on mortgage hedge securities
    14,631       (10,199 )     24,830       N/A       448       14,183       N/A  
Gain on securities, net
    23,100       6,471       16,629       N/A       4,524       18,576       N/A  
Total other-than-temporary impairment
    (10,959 )     (1,263 )     (9,696 )     N/A       (9,708 )     (1,251 )     N/A  
Portion of loss recognized in other comprehensive income
    (8,313 )     279       (8,592 )     N/A       (5,483 )     (2,830 )     N/A  
Net impairment losses recognized in earnings
    (2,646 )     (1,542 )     (1,104 )     N/A       (4,225 )     1,579       N/A  
     Total other operating revenue
  $ 157,439     $ 127,965     $ 29,474       23 %   $ 113,883     $ 43,556       38 %
                                                         
Gain (loss) on change in fair value  of mortgage servicing rights
  $ (19,458 )   $ 7,865     $ (27,323 )     N/A     $ 2,100 (1)   $ (21,558 )     N/A  
(1)  Excludes $11.8 million of initial pretax gain on the purchase of mortgage servicing rights.

Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commission revenue are a significant part of our business strategy and represented 41% of total revenue for the second quarter of 2010, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives.  We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile.  We expect continued growth in other operating revenue through offering new products and services and by expanding into markets outside of Oklahoma.  However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.


 
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Changes in Federal banking regulations that became effective on July 1, 2010 are expected to reduce overdraft fee revenue by $10 million to $15 million over the second half of 2010.  We continue to explore options to mitigate the potential revenue decrease.  In addition, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act gave federal banking agencies authority to increase the minimum deposit insurance fund ratio, increase regulatory capital requirements, impose additional rules and regulations over consumer financial products and services and limit the amount of interchange fee that may be charged in an electronic debit transaction.   The effect of this legislation on fee income and operating expenses cannot be accurately quantified at this time.

Brokerage and trading revenue increased $3.0 million or 14­­% compared to the second quarter of 2009.  Securities trading revenue totaled $14.2 million for the second quarter of 2010, up $180 thousand or 1% compared to the second quarter of 2009.  Higher mortgage lending activity by our mortgage banking customers increased the level of our mortgage securities transactions in both the second quarter of 2010 and 2009.  Customer hedging revenue, totaled $2.0 million for the second quarter of 2010, up $422 thousand or 26% over the second quarter of 2009 on higher energy prices and interest rate volatility.  Retail brokerage revenue increased $191 thousand or 4% over the second quarter of 2009 to $5.5 million and investment banking revenue increased $2.2 million over the second quarter of 2009 due to increased investment banking activity to $2.8 million.

Brokerage and trading revenue increased $3.7 million over the first quarter 2010 on higher securities trading revenue and investment banking activity.  Interest rate volatility during the second quarter of 2010 increased trading volumes in mortgage-backed securities.  Increases in securities trading revenue and investment banking revenue were partially offset by a decrease in derivative fee income and retail brokerage fees.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of ATM locations and the number of merchants served.  Transaction card revenue totaled $28.2 million for the second quarter of 2010, up $730 thousand or 3% over the second quarter of 2009.  Check card revenue increased $906 thousand or 12% to $8.4 million and merchant discounts increased $829 thousand or 12% to $7.7 million on both on higher transaction volumes, partially offset by a decline in ATM network revenue of $1.0 million or 8% below the second quarter of 2009.  Increased ATM transaction volumes were offset by a decrease in the average rate charged per transaction.  Transaction card revenue increased $2.6 million over the first quarter of 2010 primarily due to a higher volume of merchant discount fees and ATM network revenue.  Check card fees were also up.

Trust fees and commissions increased $877 thousand or 5% over the second quarter of 2009 to $17.7 million.  The revenue increase was due to the timing of tax service fees and an increase in the fair value of trust assets, partially offset by lower balances in our proprietary mutual funds.  We continue to voluntarily waive administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment.  Waived fees totaled $816 thousand for the second quarter of 2010 and $876 thousand for the second quarter of 2009.  The fair value of trust assets administered by the Company totaled $29.8 billion at June 30, 2010 compared to $30.7 billion at March 31, 2010 and $29.3 billion at June 30, 2009.  Trust fees and commissions also increased $1.4 million over the first quarter of 2010 due primarily to the timing of tax service fees.

Deposit service charges and fees increased $376 thousand or 1% compared to the second quarter of 2009.  Commercial account service charge revenue decreased $1.0 million or 12% to $7.4 million.  Customers kept greater commercial account balances which increased the earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances.  Overdraft fees increased $1.1 million or 6% to $19.3 million.  The increase in overdraft fees was primarily due to a new service charge imposed in the second quarter of 2010 on accounts that remain overdrawn for more than five days.  A 10% decrease in transaction volumes from the second quarter of 2009 was mostly offset by an 8% increase in the average per item overdraft fee charged which was implemented in the third quarter of 2009.

Deposit service charges and fees were up $2.0 million over the prior quarter largely due to a new service charge imposed on accounts that remain overdrawn more than five days partially offset by a decrease in commercial account service charge revenue in the second quarter of 2010.

Mortgage banking revenue decreased $1.5 million or 8% compared with the second quarter.  Revenue from originating and marketing mortgage loans totaled $8.8 million, a $6.3 million decrease compared to the second quarter of 2009.  Mortgage loans originated for sale in the secondary market totaled $541 million for the second quarter of 2010 and $1.0 billion for the second quarter of 2009.  Mortgage servicing revenue totaled $9.6 million, up $4.8 million or 99% over the second quarter of.  The outstanding principal balance of mortgage loans serviced for

 
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others totaled $11.1 billion at June 30, 2010 and $6.1 billion at June 30, 2009.  We purchased the rights to service approximately $4.2 billion of residential mortgage loans in the first quarter of 2010.  This purchase added servicing fee revenue of $2.0 million to the first quarter of 2010 and $3.5 million to the second quarter of 2010.

Mortgage banking revenue was up $3.5 million over the first quarter of 2010 on a $2.3 million increase in revenue from originating and marketing mortgage loans and a $1.2 million increase in mortgage servicing revenue.  Mortgage loans originated for sale in the secondary market totaled $382 million for the first quarter of 2010.  The outstanding principle balance of mortgage loans serviced for others totaled $10.9 billion at March 31, 2010.

Net gains on securities, derivatives and other assets

We recognized $8.5 million of gains on sales of $595 million of available for sale securities in the second quarter of 2010, excluding securities held as an economic hedge of mortgage servicing rights.  Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure from rising interest rates.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized an other-than-temporary impairment loss on certain private-label residential mortgage-backed securities of $2.6 million in earnings during the second quarter of 2010 related to additional declines in projected cash flows as a result of worsening trends in delinquencies and foreclosures.

Mortgage hedge securities and derivative contracts are held as an economic hedge of the changes in fair value of mortgage servicing rights that fluctuates due to changes in prepayment speeds and other assumptions as more fully described in Note 6 to the Consolidated Financial Statements.

Table 3 – Gain (Loss) on Mortgage Servicing Rights
     
(In thousands)
     
   
Three Months Ended
 
   
June 30, 2010
   
March 31, 2010
   
June 30,
2009
 
                   
Gain (loss) on mortgage hedge derivative contracts
  $ 7,800     $ (659 )   $  
Gain (loss) on mortgage hedge securities
    14,631       448       (10,199 )
Total gain (loss) on financial instruments held as an economic hedge of mortgage servicing rights
     22,431       (211 )     (10,199 )
Gain (loss) on change in fair value of mortgage servicing rights
    (19,458 )     2,100 (1)     7,865  
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
  $  2,973     $  1,889     $ (2,334 )
(1)  Excluding $11.8 million day-one gain on the purchase of mortgage servicing rights.

In addition to the gain (loss) on mortgage hedge derivative contracts, net gains or losses on derivatives includes fair value adjustments of derivatives used to manage interest rate risk and certain liabilities we have elected to carry at fair value.  Derivative instruments generally consist of interest rate swaps where we pay a variable rate based on LIBOR and receive a fixed rate.  The fair value of these swaps generally decrease in value resulting in a loss to the Company as interest rates rise and increase in value resulting in a gain to the Company as interest rates fall.  Certain certificates of deposit have been designated as reported at fair value.  This determination is made when the certificates of deposit are issued based on our intent to swap the interest rate on the certificates from a fixed rate to a LIBOR-based variable rate.  As interest rates fall, the fair value of these fixed-rate certificates of deposit generally increases and we recognize a loss.  Conversely, as interest rates rise, the fair value of these fixed-rate certificates of deposit generally decreases and we recognize a gain.

Other Operating Expense

Other operating expense for the second quarter of 2010 totaled $205.9 million, up $30.1 million or 17% compared to the second quarter of 2009.  Changes in the fair value of mortgage servicing rights increased operating expense $27.3 million.  In addition, operating expenses for the second quarter of 2009 included an $11.8 million FDIC special assessment.  Excluding changes in the fair value of mortgage servicing rights and the FDIC special assessment, operating expenses were up $14.6 million or 8%.  Personnel expenses increased $863 thousand or 1%.

 
- 9 -

 

Net losses and operating expenses related to repossessed assets were up $12.1 million over the second quarter of 2009.  Remaining non-personnel operating expenses increased $1.7 million or 2% over the prior year.

Other operating expenses increased $42.2 million compared to the first quarter of 2010.  Changes in the fair value of mortgage servicing rights increased operating expense $33.4 million.  Personnel expenses were largely unchanged compared to the first quarter of 2010  Non-personnel expenses, excluding the changes in the fair value of mortgage servicing rights, increased $8.6 million, primarily composed of a $5.8 million increase in net losses and operating expenses of repossessed assets.

During the first quarter of 2010, the Company purchased the rights to service more than 34 thousand residential mortgage loans with unpaid principal balances of $4.2 billion.  The loans to be serviced are primarily concentrated in the New Mexico market and predominately held by Fannie Mae, Freddie Mac and Ginnie Mae.  The cash purchase price for these servicing rights was approximately $32 million.  The day-one fair value of the servicing rights purchased, based on independent valuation analyses, which were further supported by assumptions and models we regularly use to value our portfolio of servicing rights, was $11.8 million higher than the purchase price.  This amount is included in the change in fair value of mortgage servicing rights for the first quarter of 2010.  The discounted purchase price can be directly attributed to the distressed financial condition of the seller, which was subsequently closed by federal banking regulators.

Table 4 – Other Operating Expense
                                     
(In thousands)
                                         
   
Three Months
         
%
               
%
 
   
Ended June 30,
   
Increase
   
Increase
   
Mar. 31,
   
Increase
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
2010
   
(Decrease)
   
(Decrease)
 
                                           
 Regular compensation
  $ 58,932     $ 58,573     $ 359       1 %   $ 57,760     $ 1,172       2 %
 Incentive compensation:
                                                       
 Cash-based
    22,148       20,427       1,721       8 %     18,677       3,471       19 %
 Stock-based
    390       2,443       (2,053 )     (84 )%     4,484       (4,094 )     (91 )%
 Total incentive compensation
    22,538       22,870       (332 )     (1 )%     23,161       (623 )     (3 )%
 Employee benefits
    15,584       14,748       836       6 %     15,903       (319 )     (2 )%
 Total personnel expense
    97,054       96,191       863       1 %     96,824       230        
 Business promotion
    4,945       4,569       376       8 %     3,978       967       24 %
 Professional fees and services
    6,668       7,363       (695 )     (9 )%     6,401       267       4 %
 Net occupancy and equipment
    15,691       15,973       (282 )     (2 )%     15,511       180       1 %
 Insurance
    5,596       5,898       (302 )     (5 )%     6,533       (937 )     (14 )%
 FDIC special assessment
          11,773       (11,773 )     (100 )%                  
 Data processing & communications
    21,940       20,452       1,488       7 %     20,309       1,631       8 %
 Printing, postage and supplies
    3,525       4,072       (547 )     (13 )%     3,322       203       6 %
 Net losses & operating expenses of repossessed assets
    13,067       996       12,071       N/A       7,220       5,847       81 %
 Amortization of intangible assets
    1,323       1,686       (363 )     (22 )%     1,324       (1 )      
 Mortgage banking costs
    10,380       9,336       1,044       11 %     9,267       1,113       12 %
 Change in fair value of mortgage servicing rights
    19,458       (7,865 )     27,323       N/A       (13,932 )     33,390       N/A  
 Other expense
    6,265       5,326       939       18 %     6,975       (710 )     (10 )%
 Total other operating expense
  $ 205,912     $ 175,770     $ 30,142       17 %   $ 163,732     $ 42,180       26 %
                                                         
 Number of employees (full-time equivalent)
    4,428       4,434       (6 )           4,425       3        
Certain percentage increases (decreases) are not meaningful for comparison purposes.


 
- 10 -

 

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $359 thousand or 1% over the second quarter of 2009 primarily due to standard annual merit increases which were effective in the second quarter of 2010.  The Company generally awards annual merit increases effective April 1st for a majority of its staff.

Incentive compensation decreased $332 thousand or 1% compared to the second quarter of 2009.  Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities to the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions.  The $1.7 million increase in cash-based incentive compensation from the second quarter of 2009 included a $545 thousand increase in commissions related to brokerage and trading revenue.

The Company also provides stock-based incentive compensation plans.  Stock-based compensation plans include both equity and liability awards.  Compensation expense related to liability awards decreased $3.0 million compared with the second quarter of 2009 due to changes in the market value of BOK Financial common stock and other investments.  The market value of BOK Financial common stock decreased $4.97 per share in the second quarter of 2010 and increased $3.17 per share in the second quarter of 2009.  Compensation expense for equity awards increased $882 thousand compared with the second quarter of 2009.  Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value.

Employee benefit expense increased $836 thousand or 6% compared to the second quarter of 2009 primarily due to increased expenses related to employee retirement plans, payroll taxes and other benefits costs, partially offset by a decrease in employee training and development costs.  Medical insurance costs were largely unchanged, down 1% from the prior year.  The Company self-insures a portion of its employee health care coverage and these costs may be volatile.

Personnel expense increased $230 thousand compared with the first quarter of 2010 primarily due to annual merit increases in regular compensation.  Incentive compensation decreased $623 thousand and employee benefits expense decreased $319 thousand.  Stock-based compensation decreased $4.1 million in the second quarter primarily due to changes in the market value of BOK Financial common stock and other investments.  Cash-based incentive compensation increased $3.5 million, including $1.8 million from commissions related to brokerage and trading revenue.  Employee benefit expenses for the first quarter of 2010 include a seasonal increase in payroll taxes.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights and an FDIC special assessment, increased $13.7 million over the second quarter of 2009.  Higher net losses and operating expenses related to repossessed assets and mortgage banking costs was offset by decreases in most other operating expense categories.  Net losses and operating expenses of repossessed assets increased $12.1 million, data processing and communications expense increased $1.5 million on higher transaction volumes and mortgage banking costs increased $1.0 million.  Net losses from sales and write-downs of repossessed property increased $10.7 million based on our quarterly review of carrying values.  Operating expenses on repossessed assets increased $1.4 million.

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $8.6 million compared to the first quarter of 2010 primarily due to a $5.8 million increase in net losses and operating expenses of repossessed assets.  Net losses from sales and write-downs of repossessed property increased $5.6 million based on our quarterly review of carrying values.  Operating expenses on repossessed assets were up $202 thousand.  In addition, data processing expense increased $1.7 million driven primarily by increased transaction card volumes.


 
- 11 -

 

Income Taxes

Income tax expense was $32.0 million or 33% of book taxable income for the second quarter of 2010 compared to $28.3 million or 35% of book taxable income for the second quarter of 2009 and $30.3 million or 33% of book taxable income for the first quarter of 2010.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions.  Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations.  The reserve for uncertain tax positions was approximately $13 million at June 30, 2010 and was largely unchanged from March 31, 2010.
 
 

Lines of Business

We operate three principal lines of business: commercial banking, consumer banking and wealth management.  Commercial banking includes lending, treasury and cash management services and customer risk management products to small businesses, middle market and larger commercial customers.  Commercial banking also includes the TransFund network.  Consumer banking includes retail lending and deposit services and all mortgage banking activities. Wealth management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets.  Wealth management also originates loans for high net worth clients.

In addition to our lines of business, we have a funds management unit.  The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations.  Operating results for funds management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business.

We allocate resources and evaluate the performance of our lines of business after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration.  Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk.  This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk.

The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates.  Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts.  The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

Economic capital is assigned to the business units by a capital allocation model that reflects management’s assessment of risk.  This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units.  The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible.  Average invested capital includes economic capital and amounts we have invested in the lines of business.

As shown in Table 5, net income attributable to our lines of business increased $1.2 million over the second quarter of 2009.   The increase in net income attributed to our lines of business was due primarily decreased operating expenses attributed to the lines of business and an increase in the gain on the changes in the fair value of the mortgage servicing rights, net of economic hedges, offset by increased net losses on repossessed assets.  The increase in net income attributed to funds management and other was primarily due to growth in the securities portfolio and a decrease in loan loss provision.


 
- 12 -

 


Table 5 – Net Income by Line of Business
           
(In thousands)
           
   
Three Months Ended June 30,
   
Six Month Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Commercial banking
  $ 13,353     $ 16,326     $ 24,777     $ 32,845  
Consumer banking
    9,018       6,653       25,596       16,050  
Wealth management
    3,535       1,707       6,657       7,219  
Subtotal
    25,906       24,686       57,030       56,114  
Funds management and other
    37,616       27,429       66,625       51,033  
Total
  $ 63,522     $ 52,115     $ 123,655     $ 107,147  

Commercial Banking

Commercial banking contributed $13.4 million to consolidated net income in the second quarter of 2010, down from $16.3 million in the second quarter of 2009.  The decrease in commercial banking net income was primarily due to a $10.8 million increase in losses on repossessed assets, partially offset by a $5.3 million decrease in operating expenses compared to the prior year.  Operating revenues were flat compared to the prior year.  Net interest revenue and charge-offs decreased from the second quarter of 2009.


Table 6 – Commercial Banking
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
NIR (expense) from external sources
  $ 85,116     $ 87,016     $ (1,900 )   $ 170,014     $ 172,615     $ (2,601 )
NIR (expense) from internal sources
    (12,712 )     (13,251 )     539       (25,173 )     (25,950 )     777  
                                                 
Total net interest revenue
    72,404       73,765       (1,361 )     144,841       146,665       (1,824 )
                                                 
Other operating revenue
    33,642       33,837       (195 )     63,461       67,261       (3,800 )
Operating expense
    50,973       56,286       (5,313 )     101,131       110,032       (8,901 )
Net loans charged off
    22,477       24,655       (2,178 )     50,856       49,013       1,843  
Gain (loss) on repossessed assets, net
    (10,742 )     59       (10,801 )     (15,764 )     (1,125 )     (14,639 )
Income before taxes
    21,854       26,720       (4,866 )     40,551       53,756       (13,205 )
Federal and state income tax
    8,501       10,394       (1,893 )     15,774       20,911       (5,137 )
                                                 
Net income
  $ 13,353     $ 16,326     $ (2,973 )   $ 24,777     $ 32,845     $ (8,068 )
                                                 
Average assets
  $ 8,990,120     $ 10,381,632     $ (1,391,512 )   $ 9,086,117     $ 10,566,763     $ (1,480,646 )
Average loans
    8,237,283       9,436,325       (1,199,042 )     8,305,366       9,618,102       (1,312,736 )
Average deposits
    5,941,486       5,234,401       707,085       5,816,028       4,993,078       822,950  
Average invested capital
    990,239       1,067,061       (76,822 )     1,005,051       1,086,626       (81,575 )
Return on average assets
    0.60 %     0.63 %  
(3) b.p.
      0.55 %     0.63 %  
(8) b.p.
 
Return on invested capital
    5.41 %     6.14 %  
(73) b.p.
      4.97 %     6.10 %  
(113) b.p.
 
Efficiency ratio
    48.07 %     52.31 %  
(424) b.p.
      48.55 %     51.43 %  
(288) b.p.
 
Net charge-offs (annualized) to average loans
    1.09 %     1.05 %  
4 b.p.
      1.23 %     1.03 %  
20 b.p.
 

Net interest revenue decreased $1.4 million or 2% from the second quarter of 2009.  Average loan balances attributed to commercial banking decreased $1.2 billion due to reduced customer demand and normal repayment trends, which decreased net interest revenue by $6.6 million.  This was offset by a $4.2 million improvement in loan spreads on loans attributable to commercial banking.  The decreased internal transfer pricing credit provided to the commercial banking unit on $5.2 billion of average deposits sold to the funds management unit reduced net interest revenue by approximately $1.1 million as deposit spreads compressed due to lower interest rates in the second

 
- 13 -

 

quarter of 2010 compared to the second quarter of 2009.  This decrease was partially offset by a $384 thousand increase in net interest revenue related to a $707 million increase in average deposits compared to the second quarter of 2009.

Other operating revenue was largely unchanged from the second quarter of 2009.  Service charges on commercial deposit accounts were down $1.0 million compared to the second quarter of 2009 as customers kept greater commercial deposit balances to offset the decrease in the earnings credit, which provides a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balance.  This was mostly offset by a $505 thousand increase in brokerage and trading revenue.

Operating expenses were down $5.3 million or 9% compared to the second quarter of 2009.  Costs allocated to the commercial banking segment were down $7.0 million primarily on reduced lending activities.   This was partially offset by $1.4 million of increased data processing costs related to higher transaction card volumes and a $1.1 million increase in repossession expenses.  Average repossessed asset balances increased $51 million over the second quarter of 2009.

The average outstanding balance of loans attributed to commercial banking was $9.0 billion for the second quarter of 2010, down $1.4 billion or 13% compared to the second quarter of 2009.  See Loan section following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the commercial banking segment.  Net commercial banking loans charged off decreased $2.2 million compared to the second quarter of 2009 to $22.5 million or 1.09% of average loans attributed to this line of business on an annualized basis.
 
 
Average deposits attributed to commercial banking were $5.9 billion for the second quarter of 2010, up $707 million or 14% over the second quarter of 2009.  Average balances attributed to our energy customers increased $238 million or 56% and average deposit balances attributed to our commercial & industrial customers increased $175 million or 9%.  Average deposit balances attributable to our small business customers increased $139 million or 14% over the second quarter of 2009.  Average treasury services deposit balances increased $109 million or 7% and average deposits attributable to our commercial real estate customers increased $25 million or 11%.



 
- 14 -

 

Consumer Banking

Consumer banking services are provided through four primary distribution channels:  traditional branches, supermarket branches, the 24-hour ExpressBank call center and online internet banking.

Consumer banking contributed $9.0 million to consolidated net income for the second quarter of 2010, up $2.4 million compared to the second quarter of 2009.  The change in the fair value of the mortgage servicing rights, net of economic hedge contributed $3.0 million to net income for the second quarter of 2010, up $5.3 million compared to the second quarter of 2009.  Net charge-offs of loans attributed to the consumer banking unit increased $4.3 million over the second quarter of 2009, partially offset by a $2.9 million decrease in operating expenses compared to the second quarter of 2009.

Table 7 – Consumer Banking
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 21,587     $ 12,877     $ 8,710     $ 41,171     $ 25,199     $ 15,972  
NIR (expense) from internal sources
    11,452       21,146       (9,694 )     23,312       46,108       (22,796 )
                                                 
Total net interest revenue
    33,039       34,023       (984 )     64,483       71,307       (6,824 )
                                                 
Other operating revenue
    50,466       49,632       834       93,709       94,917       (1,208 )
Operating expense
    61,874       64,759       (2,885 )     118,203       126,388       (8,185 )
Net loans charged off
    9,943       5,653       4,290       13,276       11,236       2,040  
Increase (decrease) in fair value of mortgage service rights
    (19,458 )     7,865       (27,323 )     (5,526 )     9,820       (15,346 )
Gain (loss) on financial instruments,
   net
    22,431       (10,199 )     32,630       22,220       (12,317 )     34,537  
Gain (loss) on repossessed assets, net
    98       (20 )     118       121       166       (45 )
Income before taxes
    14,759       10,889       3,870       43,528       26,269       17,259  
Federal and state income tax
    5,741       4,236       1,505       16,932       10,219       6,713  
                                                 
Net income
  $ 9,018     $ 6,653     $ 2,365     $ 26,596     $ 16,050     $ 10,546  
                                                 
Average assets
  $ 6,198,808     $ 6,258,278     $ (59,470 )   $ 6,179,261     $ 6,150,752     $ 28,509  
Average loans
    2,142,757       2,637,934       (495,177 )     2,144,105       2,637,179       (493,074 )
Average deposits
    6,094,975       6,156,665       (61,690 )     6,079,960       6,051,901       28,059  
Average invested capital
    208,648       246,247       (37,599 )     204,723       233,987       (29,264 )
Return on average assets
    0.58 %     0.43 %  
15 b.p.
      0.87 %     0.53 %  
34 b.p.
 
Return on invested capital
    17.34 %     10.84 %  
650 b.p.
      26.20 %     13.83 %  
1,237 b.p.
 
Efficiency ratio
    74.10 %     77.41 %  
(331) b.p.
      74.72 %     76.03 %  
(131) b.p.
 
Net charge-offs (annualized) to
   average loans
    1.86 %     0.86 %  
100 b.p.
      1.25 %     0.86 %  
39 b.p.
 
Mortgage loans funded for resale
  $ 540,741     $ 1,023,272     $ (482,531 )   $ 922,769     $ 1,731,833     $ (809,064 )

   
June 30, 2010
   
June 30, 2009
   
Increase
(Decrease)
 
Branch locations
    198       197       1  
Mortgage loans serviced for others
  $ 11,057,385     $ 6,082,501     $ 4,974,884  

Net interest revenue from consumer banking activities decreased $984 thousand or 3% from the second quarter of 2009.  Average earning assets were flat compared to the second quarter of 2009, decreasing only $59 million.  Net interest revenue decreased $1.4 million related to a $495 million decrease in average loan balances attributed to the consumer banking division and $946 thousand due to a decrease in loan margins.  Average loans decreased $250 million from the second quarter of 2009, due to the previously disclosed decision by the Company to exit the indirect automobile loan business in the first quarter of 2009.

 
- 15 -

 

Other operating revenue increased $834 thousand or 2% over the second quarter of 2009 primarily due to a $1.4 million increase in deposits service charges due to a new service charge imposed on accounts that remain overdrawn for more than five days, offset by a $1.5 million decrease in mortgage banking revenue as mortgage lending volumes have declined from their historic highs in the second quarter of 2009.  Transaction card revenue increased $891 thousand or 11% over the second quarter of 2009.

Operating expenses decreased $2.9 million or 4% compared to the second quarter of 2009, primarily due to a $5.8 million decrease in corporate expenses allocated to the consumer banking division, partially offset by a $2.4 million increase in repossession expenses.

Net loans charged off by the consumer banking unit totaled $9.9 million in the second quarter of 2010 up from $5.7 million in the second quarter of 2009.  Net consumer banking charge-offs include residential mortgage loans, indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.  The increase in net loans charged-off was due primarily to residential mortgage loans.

Average consumer deposits decreased $62 million or 1% compared to the second quarter of 2009.  Average interest-bearing transaction accounts were up $391 million or 17% and average demand deposit accounts increased $42 million or 5% over the second quarter of 2009.  Average time deposits decreased $507 million or 18% compared to the second quarter of 2009.  Movement of funds among the various types of consumer deposits was largely based on interest rates and product features offered.

Our Consumer Banking division originates, markets and services conventional and government-sponsored mortgage loans for all of our geographical markets.  During the second quarter of 2010, $604 million of mortgage loans were funded compared with $1.0 billion funded in the second quarter of 2009.  Approximately 47% of our mortgage loans funded was in the Oklahoma market, 15% in the Texas market and 12% in the Colorado market.  In addition to the $11 billion of mortgage loans serviced for others, the Consumer banking division also services $806 million of loans for affiliated entities.  Approximately 96% of the mortgage loans serviced were to borrowers in our primary geographical market areas.  Mortgage servicing revenue increased to $9.6 million in the second quarter of 2010 from $8.4 million in the second quarter of 2009, primarily due to mortgage servicing rights purchased in the first quarter of 2010.

Changes in fair value of our mortgage loan servicing rights, net of economic hedge, increased consumer banking net income by $3.0 million in the second quarter of 2010 compared with a decrease in net income of $2.3 million in the second quarter of 2009.  Changes in the fair value of mortgage servicing rights and securities held as an economic hedge are due to movements in interest rates, actual and anticipated loan prepayment speeds and related factors.


 
- 16 -

 

Wealth Management

Wealth Management contributed consolidated net income of $3.5 million, up $1.8 million or 107% over the second quarter 2009. The increase in net income was primarily due to an increase in investment banking and trust fees.

Table 8 – Wealth Management
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 8,324     $ 5,690     $ 2,634     $ 16,928     $ 9,545     $ 7,383  
NIR (expense) from internal sources
    2,391       5,723       (3,332 )     5,412       13,326       (7,914 )
                                                 
Total net interest revenue
    10,715       11,413       (698 )     22,340       22,871       (531 )
                                                 
Other operating revenue
    42,020       38,556       3,464       79,340       79,829       (489 )
Operating expense
    43,829       42,546       1,283       84,901       84,327       574  
Net loans charged off
    3,135       4,629       (1,494 )     5,900       6,558       (658 )
Gain on financial instruments, net
    15             15       16             16  
Income before taxes
    5,786       2,794       2,992       10,895       11,815       (920 )
Federal and state income tax
    2,251       1,087       1,164       4,238       4,596       (358 )
                                                 
Net income
  $ 3,535     $ 1,707     $ 1,828     $ 6,657     $ 7,219     $ (562 )
                                                 
Average assets
  $ 3,355,079     $ 3,092,574     $ 262,505     $ 3,321,811     $ 3,049,610     $ 272,201  
Average loans
    1,084,581       1,049,921       34,660       1,084,835       1,038,787       46,048  
Average deposits
    3,273,332       3,024,808       248,524       3,241,774       2,977,227       264,547  
Average invested capital
    170,086       201,630       (31,544 )     171,271       194,880       (23,609 )
Return on assets
    0.42 %     0.22 %  
20 b.p.
      0.40 %     0.48 %  
(8) b.p.
 
Return on invested capital
    8.34 %     3.40 %  
494 b.p.
      7.84 %     7.47 %  
37 b.p.
 
Efficiency ratio
    83.11 %     85.14 %  
(203) b.p.
      83.50 %     82.11 %  
139 b.p.
 
Net charge-offs (annualized) to average loans
    1.16 %     1.77 %  
(61) b.p.
      1.10 %     1.27 %  
(17) b.p.
 

   
June 30,
2010
   
June 30, 2009
   
Increase
(Decrease)
 
Trust assets
  $ 29,825,608     $ 29,288,041     $ 537,567  

Net interest revenue for the second quarter of 2010 was down $698 thousand or 6% compared to the second quarter of 2009.  Net interest revenue decreased $1.2 million due to lower internal transfer pricing credit provided to the wealth management segment for deposits sold to our funds management unit, partially offset by a $624 thousand increase in net interest revenue due to a $249 million increase in average deposits.

Other operating revenue increased $3.5 million or 9% over the second quarter of 2009.  Investment banking revenue increased $1.9 million on increased activity.  Trust fees and commissions were up $884 thousand or 5% primarily due to the timing of tax service fees and an increase in the fair value of trust assets.

Operating expenses increased $1.3 million over the second quarter of 2009 primarily due to a $1.9 million increase in commissions related to brokerage and trading revenue.

Growth in average assets was largely due to funds sold to the funds management unit.  Funds provided by wealth management deposits, which are largely sold to the funds management unit, increased primarily due to an increase in interest bearing transaction accounts and demand deposits, offset by a decrease in higher costing time deposits.    The continued growth in wealth management deposits reflect continued movement of customer funds from managed money market products that were not on the Company’s balance sheet to deposits as well as high net worth customer relationship growth.  Average deposits provided by the wealth management division in the second quarter of 2010.

 
- 17 -

 

increased $249 million compared over the second quarter of 2009.  Interest-bearing transaction accounts averaged $2.3 billion for the second quarter of 2010, an increase of $351 million or 25% over the second quarter of 2009.  Average time deposits were $694 million, down $262 million or 27% compared to last year.

At June 30, 2010 and  2009, the Wealth Management line of business was responsible for trust assets with aggregate market values of $29.8 billion and $29.3 billion, respectively, under various fiduciary arrangements.  We have sole or joint discretionary authority over $10.3 billion of trust assets at June 30, 2010 compared to $11.0 billion of trust assets at June 30, 2009.  The fair value of non-managed assets totaled $19.5 billion at June 30, 2010 and $18.2 billion at June 30, 2009.  The fair value of assets held in safekeeping totaled $7.4 billion at June 30, 2010 and $7.9 billion at June 30, 2009.


Geographical Market Distribution

The Company also secondarily evaluates performance by primary geographical market.  Loans are generally attributed to geographical markets based on the location of the customer and may not reflect the location of the underlying collateral.  Brokered deposits and other wholesale funds are not attributed to a geographical market.  Funds management and other also includes insignificant results of operations in locations outside our primary geographic regions.


Table 9 – Net Income by Geographic Region
           
(In thousands)
           
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Oklahoma
  $ 24,528     $ 27,210     $ 57,308     $ 52,077  
Texas
    6,570       2,490       12,117       9,386  
New Mexico
    2,849       1,444       3,125       4,050  
Arkansas
    126       2,621       445       6,326  
Colorado
    (140 )     412       964       (1,472 )
Arizona
    (8,881 )     (11,078 )     (17,230 )     (17,636 )
Kansas / Missouri
    1,152       1,639       1,867       3,375  
Subtotal
    26,204       24,738       58,596       56,106  
Funds management and other
    37,318       27,377       65,059       51,041  
Total
  $ 63,522     $ 52,115     $ 123,655     $ 107,147  

Oklahoma Market

Oklahoma is a significant market to the Company.  Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas.  Approximately 50% of our average loans, 54% of our average deposits and 39% of our consolidated net income is attributed to the Oklahoma market.  In addition, all of our mortgage servicing activity and 76% of our trust assets are attributed to the Oklahoma market.

 
- 18 -

 



Table 10 – Oklahoma
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 59,810     $ 59,964     $ (154 )   $ 118,582     $ 121,710     $ (3,128 )
                                                 
Other operating revenue
    85,589       87,792       (2,203 )     156,342       163,786       (7,444 )
Operating expense
    87,842       93,842       (6,000 )     167,425       184,583       (17,158 )
Net loans charged off
    19,979       7,066       12,913       30,563       13,389       17,174  
Increase (decrease) in fair value of
   mortgage service rights
    (19,458 )     7,865       (27,323 )     (5,526 )     9,820       (15,346 )
Gain (loss) on financial instruments, net
    22,447       (10,199 )     32,646       22,236       (12,317 )     34,553  
Gain (loss) on repossessed assets, net
    (423 )     20       (443 )     147       206       (59 )
Income before taxes
    40,144       44,534       (4,390 )     93,793       85,233       8,560  
Federal and state income tax
    15,616       17,324       (1,708 )     36,485       33,156       3,329  
                                                 
Net income
  $ 24,528     $ 27,210     $ (2,682 )   $ 57,308     $ 52,077     $ 5,231  
                                                 
Average assets
  $ 9,616,880     $ 8,917,230     $ 699,650     $ 9,435,759     $ 8,851,925     $ 583,834  
Average loans
    5,484,597       6,307,355       (822,758 )     5,515,230       6,392,727       (877,497 )
Average deposits
    8,596,629       7,940,597       656,032       8,460,892       7,754,242       706,650  
Average invested capital
    526,729       564,884       (38,155 )     523,757       584,881       (61,124 )
Return on average assets
    1.02 %     1.22 %  
(20) b.p.
      1.22 %     1.19 %     0.03 %
Return on invested capital
    18.68 %     19.32 %  
(64) b.p.
      22.06 %     17.96 %  
410 b.p.
 
Efficiency ratio
    60.41 %     63.51 %  
(310) b.p.
      60.90 %     64.65 %  
(375) b.p.
 
Net charge-offs (annualized) to average loans
    1.46 %     0.45 %  
101 b.p.
      1.12 %     0.42 %  
70 b.p.
 

Net income generated in the Oklahoma market in the second quarter of 2010 decreased $2.7 million or 10% compared to the second quarter of 2009, primarily due to a $12.9 million increase in net loans charged off as compared to the second quarter of 2009, partially offset by $6 million decrease in operating expenses.  The change in the fair value of the mortgage servicing rights, net of economic hedge improved $5.3 million over the second quarter of 2009.

Net interest revenue was flat with the second quarter of 2009.  Average loans decreased $823 million, offset by improving interest spreads on loans.  The benefit to net interest revenue from average deposit growth of $656 million over the second quarter of 2009 was offset by lower internal funds transfer credit provided for deposits sold to the funds management unit.
 
 
Other operating revenue decreased $2.2 million or 3% compared to the second quarter of 2009.  Transaction card revenue decreased $1.7 million and mortgage banking revenue declined $1.2 million.  Brokerage and trading revenue increased $332 thousand and trust fees and commissions increased $251 thousand over the prior year.

Other operating expenses decreased $6.0 million compared to the prior year, primarily due to a decrease in corporate expenses allocated to the Oklahoma market, partially offset by an increase in personnel expenses and foreclosure expenses.

Net loans charged off totaled $20.0 million or 1.46% of average loans on an annualized basis for second quarter of 2010 compared with $7.1 million or 0.45% of average loans on an annualized basis for the second quarter of 2009.  Net loans charged off in the second quarter of 2010 included $8.7 million from a single condominium and commercial office development project.


 
- 19 -

 

Average deposits in the Oklahoma market for the second quarter of 2010 increased $656 million over the second quarter of 2009.  Commercial and wealth management units, including trust, broker/dealer and private banking also increased over the prior year, partially offset by a decrease in consumer banking deposits.

The change in the fair value of the mortgage servicing rights, net of economic hedge increased net income by $3.0 million in the second quarter of 2010 compared to reducing net income by $2.3 million in the second quarter of 2009.

Texas Market

Texas is our second largest market.  Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas.  Approximately 31% of our average loans, 24% of our average deposits and 10% of our consolidated net income is attributed to the Texas market.

Table 11 – Texas
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 32,898     $ 33,726     $ (828 )   $ 65,803     $ 68,548     $ (2,745 )
                                                 
Other operating revenue
    14,908       10,264       4,644       29,493       23,591       5,902  
Operating expense
    32,194       33,747       (1,553 )     64,165       65,685       (1,520 )
Net loans charged off
    4,700       6,278       (1,578 )     11,125       11,722       (597 )
Gain (loss) on repossessed assets, net
    (647 )     (75 )     (572 )     (1,073 )     (67 )     (1,006 )
Income before taxes
    10,265       3,890       6,375       18,933       14,665       4,268  
Federal and state income tax
    3,695       1,400       2,295       6,816       5,279       1,537  
                                                 
Net income
  $ 6,570     $ 2,490     $ 4,080     $ 12,117     $ 9,386     $ 2,731  
                                                 
Average assets
  $ 4,345,595     $ 4,073,519       272,076     $ 4,336,985     $ 4,057,099       279,886  
Average loans
    3,348,494       3,695,684       (347,190 )     3,341,463       3,768,371       (426,908 )
Average deposits
    3,786,650       3,619,200       167,450       3,767,268       3,506,710       260,558  
Average invested capital
    533,418       546,875       (13,457 )     538,400       545,716       (7,316 )
Return on average assets
    0.61 %     0.25 %  
36 b.p.
      0.56 %     0.47 %  
10 b.p.
 
Return on invested capital
    4.94 %     1.83 %  
311 b.p.
      4.54 %     3.47 %  
107 b.p.
 
Efficiency ratio
    67.34 %     76.72 %  
(937) b.p.
      67.33 %     71.29 %  
(396) b.p.
 
Net charge-offs (annualized) to average loans
    0.56 %     0.68 %  
(12) b.p.
      0.67 %     0.63 %  
4 b.p.
 

Net income in the Texas market increased $4.1 million compared to the second quarter of 2009 primarily due to increased operating revenue, decreased operating expenses and decreased net loans charged off.

Net interest revenue decreased $828 thousand or 2% compared to the second quarter of 2009.  Average outstanding loans decreased $347 million or 9% compared to the second quarter of 2009.  Average deposits increased $167 million or 5%.  The benefit of an increase in average deposits was offset by the average decrease in loans and reduced the benefit from funds sold to the funds management unit.

Other operating revenue increased $4.6 million or 45% over the second quarter of 2009 primarily due to an increase in trading and brokerage fees, transaction card revenue, mortgage banking revenue and trust fees.  Operating expenses were down $1.6 million compared to the prior year primarily due to a decrease in corporate expenses allocated to the Texas market.  Personnel expenses were flat with the second quarter of 2009.

Net loans charged off totaled $4.7 million or 0.56% of average loans for second quarter of 2010 on an annualized basis, down from $6.3 million or 0.68% of average loans for the second quarter of 2009 on an annualized basis.

 
- 20 -

 

Other Markets

For the second quarter of 2010, net income attributable to our New Mexico market increased $1.4 million compared to the second quarter of 2009 to $2.8 million or 4% of consolidated net income.  The increase in net income attributed to New Mexico resulted primarily from a $1.5 million decrease in corporate expenses allocated to the New Mexico market as well as a $1.1 million increase in net loans charged off.  Although we attribute all mortgage servicing to the Oklahoma market, the purchase of the rights to service $4.2 billion of residential mortgage loans in the first quarter of 2010 gives us the ability to further develop relationships with approximately 34 thousand additional customers, primarily located in the New Mexico market.

For the second quarter of 2010, net income in the Arkansas market decreased to $126 thousand from $2.6 million in the second quarter of 2009 primarily due to an increase in corporate expenses allocated to the Arkansas market and an increase in net loans charged off.  Average deposits in our Arkansas market were up $20 million or 14% over the second quarter of 2009 due primarily to commercial banking deposits.  Wealth management and consumer deposits also increased over the second quarter of 2009.

We incurred a net loss of $140 thousand in the Colorado market in the second quarter of 2010, compared to net income of $412 thousand in second quarter of 2009 primarily due to the decline in net interest revenue as a results of a $160 million or 20% decline in the average outstanding commercial loan balances.  Net loans charged off increased $509 thousand over the second quarter of 2009 to $3.4 million or 1.75% of average loan on an annualized basis.

We incurred a net loss of $8.9 million in the Arizona market in the second quarter of 2010 compared with a net loss of $11.1 million in the second quarter of 2009.  The loss was largely due to an $8.0 million increase in losses on repossessed assets, primarily composed of commercial real estate.  Net loans charged off were down $11.3 million from the prior year and totaled $4.9 million or 3.87% of average loans on an annualized basis compared with $16.2 million or 11.26% of average loans on an annualized basis in the second quarter of 2009.   Average deposits increased $30 million over the second quarter of 2009 and average loans decreased $68 million compared to the prior year.

Consistent with plans when we first acquired Valley Commerce Bank in Phoenix in 2005, our objective is to focus on growth in commercial and small business lending in the Arizona market.  We expanded our commercial lending staff in this market and opened three new banking locations during 2009.  We have significantly scaled back commercial real estate lending activities which were not contemplated in our initial expansion into this market and exited the Tucson market in the first quarter of 2009 which we first entered in 2006.  Losses incurred during the first half of 2010 and all of 2009 are largely due to commercial real estate lending.  Commercial loans attributed to the Arizona market decreased by $4.7 million from March 31, 2010 and commercial real estate loans were down $39 million from March 31, 2010.  Assets attributable to the Arizona market included $16 million of goodwill that may be impaired in future periods if these commercial and small business lending growth plans are unsuccessful.

Net income attributed to the Kansas/Missouri market decreased $487 thousand compared to the second quarter of 2009, primarily due to a $1.2 million increase in operating expenses.   Total average deposits increased $12 million over the second quarter of 2009 and average loans decreased $41 million compared to the prior year.

 
- 21 -

 



Table 12 – New Mexico
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 7,940     $ 8,305     $ (365 )   $ 15,683     $ 16,766     $ (1,083 )
                                                 
Other operating revenue
    6,272       5,549       723       12,094       11,919       175  
Operating expense
    8,595       10,046       (1,451 )     16,850       19,182       (2,332 )
Net loans charged off
    344       1,444       (1,100 )     3,122       1,949       1,173  
Loss on repossessed assets, net
    (610 )           (610 )     (2,691 )     (925 )     (1,766 )
Income before taxes
    4,663       2,364       2,299       5,114       6,629       (1,515 )
Federal and state income tax
    1,814       920       894       1,989       2,579       (590 )
                                                 
Net income
  $ 2,849     $ 1,444     $ 1,405     $ 3,125     $ 4,050     $ (925 )
                                                 
Average assets
  $ 1,286,675     $ 1,271,398     $ 15,277     $ 1,279,968     $ 1,243,544       36,424  
Average loans
    723,580       832,903       (109,323 )     732,244       829,815       (97,917 )
Average deposits
    1,203,080       1,151,349       51,731       1,200,678       1,132,838       67,840  
Average invested capital
    79,975       98,705       (18,730 )     82,961       98,588       (15,627 )
Return on average assets
    0.89 %     0.46 %  
43 b.p.
      0.49 %     0.66 %  
(16) b.p.
 
Return on invested capital
    14.29 %     5.87 %  
842 b.p.
      7.60 %     8.28 %  
(69) b.p.
 
Efficiency ratio
    60.48 %     72.51 %  
(1,204) b.p.
      60.66 %     66.87 %  
(621) b.p.
 
Net charge-offs (annualized) to average loans
    0.19 %     0.70 %  
(50) b.p.
      0.86 %     0.47 %  
39 b.p.
 

 
 

Table 13 – Arkansas
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 2,360     $ 3,009     $ (649 )   $ 5,277     $ 5,958     $ (681 )
                                                 
Other operating revenue
    8,907       9,156       (249 )     17,520       20,196       (2,676 )
Operating expense
    8,520       7,031       1,489       17,427       13,969       3,458  
Net loans charged off
    2,207       845       1,362       4,206       1,831       2,375  
Loss on repossessed assets, net
    (333 )           (333 )     (435 )     (1 )     (434 )
Income before taxes
    207       4,289       (4,082 )     729       10,353       (9,624 )
Federal and state income tax
    81       1,668       (1,587 )     284       4,027       (3,743 )
                                                 
Net income
  $ 126     $ 2,621     $ (2,495 )   $ 455     $ 6,326     $ (5,881 )
                                                 
Average assets
  $ 358,649     $ 434,018     $ (75,369 )   $ 371,013     $ 439,923     $ (68,910 )
Average loans
    336,091       422,898       (86,807 )     350,601       429,078       (78,477 )
Average deposits
    165,346       145,550       19,796       172,725       142,781       29,944  
Average invested capital
    23,682       35,656       (11,974 )     24,548       34,010       (9,462 )
Return on average assets
    0.14 %     2.42 %  
(228) b.p.
      0.24 %     2.90 %  
(266) b.p.
 
Return on invested capital
    2.13 %     29.48 %  
(2,735) b.p.
      3.66 %     37.51 %  
(3,385) b.p.
 
Efficiency ratio
    75.62 %     57.80 %  
1,782 b.p.
      76.44 %     53.41 %  
2,303 b.p.
 
Net charge-offs (annualized) to average loans
    2.63 %     0.80 %  
183 b.p.
      2.42 %     0.86 %  
156 b.p.
 

 
- 22 -

 


Table 14 – Colorado
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
       
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 8,198     $ ­­­ 9,336     $ (1,138 )   $ 16,652     $ 18,397     $ (1,745 )
                                                 
Other operating revenue
    4,802       4,093       709       9,995       9,262       733  
Operating expense
    9,233       10,200       (967 )     18,429       19,236       (807 )
Net loans charged off
    3,397       2,888       509       6,042       10,889       (4,847 )
Loss on repossessed assets, net
    (599 )     333       (932 )     (599 )     57       (656 )
Income (loss) before taxes
    (229 )     674       (903 )     1,577       (2,409 )     3,986  
Federal and state income tax
    (89 )     262       (351 )     613       (937 )     1,550  
                                                 
Net income (loss)
  $ (140 )   $ 412     $ (552 )   $ 964     $ (1,472 ))   $ 2,436  
                                                 
Average assets
  $ 1,198,000     $ 1,245,346     $ (47,346 )   $ 1,202,076     $ 1,228,795     $ (26,719 )
Average loans
    778,405       962,947       (184,542 )     797,053       969,830       (172,777 )
Average deposits
    1,126,479       1,169,336       (42,857 )     1,131,217       1,155,557       (24,340 )
Average invested capital
    123,424       159,077       (35,653 )     128,116       142,173       (14,057 )
Return on average assets
    (0.05 %)     0.13 %  
(18) b.p.
      0.16 %     (0.24 %)  
40 b.p.
 
Return on invested capital
    (0.45 %)     1.04 %  
(149) b.p.
      1.52 %     (2.09 %)  
361 b.p
 
Efficiency ratio
    71.02 %     75.96 %  
(493) b.p.
      69.16 %     69.55 %  
(39) b.p
 
Net charge-offs (annualized) to average loans
    1.75 %     1.20 %  
55 b.p.
      1.53 %     2.26 %  
(74) b.p
 


Table 15 – Arizona
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
(Increase)
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 2,680     $ 2,912     $ (232 )   $ 5,303     $ 5,757     $ (454 )
                                                 
Other operating revenue
    664       105       559       1,820       1,149       671  
Operating expense
    4,949       4,695       254       9,329       9,246       83  
Net loans charged off
    4,921       16,214       (11,293 )     15,022       26,295       (11,273 )
Gains (losses) on repossessed assets, net
    (8,010 )     (239 )     (7,771 )     (10,971 )     (229 )     (10,742 )
Loss before taxes
    (14,536 )     (18,131 )     3,595       (28,199 )     (28,864 )     665  
Federal and state income tax
    (5,655 )     (7,053 )     1,398       (10,969 )     (11,228 )     259  
                                                 
Net loss
  $ (8,881 )   $ (11,078 )   $ 2,197     $ (17,230 )   $ (17,636 )   $ 406  
                                                 
Average assets
  $ 596,799     $ 628,216     $ (31,417 )   $ 595,085     $ 622,767     $ (27,682 )
Average loans
    509,595       577,458       (67,863 )     511,485       582,433       (70,948 )
Average deposits
    212,438       182,403       30,035       205,929       164,539       41,390  
Average invested capital
    60,374       84,596       (24,222 )     61,808       86,280       (24,472 )
Return on average assets
    (5.97 %)     (7.07 %)  
110 b.p.
      (5.84 %)     (5.71 %)  
(13) b.p.
 
Return on invested capital
    (59.00 %)     (52.52 %)  
(648) b.p.
      (56.22 %)     (41.22 %)  
(1,500) b.p.
 
Efficiency ratio
    148.00 %     155.62 %  
(762) b.p.
      130.97 %     133.886 %  
(291) b.p.
 
Net charge-offs (annualized) to average loans
    3.87 %     11.26 %  
(739) b.p.
      5.92 %     9.10 %  
(318) b.p.
 


 
- 23 -

 



Table 16 – Kansas / Missouri
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
(Increase)
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
Net interest revenue
  $ 2,271     $ 1,942     $ 329     $ 4,363     $ 3,657     $ 706  
                                                 
Other operating revenue
    4,677       4,747       (70 )     8,673       10,547       (1,874 )
Operating expense
    5,036       3,806       1,230       10,007       7,948       2,059  
Net loans charged off (recovered)
    6       201       (195 )     (48 )     733       (781 )
Gains (losses) on repossessed assets, net
    (21 )             (21 )     (21 )             (21 )
Income before taxes
    1,885       2,682       (797 )     3,056       5,523       (2,467 )
Federal and state income tax
    733       1,043       (310 )     1,189       2,148       (959 )
                                                 
Net income
  $ 1,152     $ 1,639     $ (487 )   $ 1,867     $ 3,375     $ (1,508 )
                                                 
Average assets
  $ 296,272     $ 327,212     $ (30,940 )   $ 297,146     $ 320,832     $ (23,686 )
Average loans
    283,859       324,747       (40,888 )     286,228       318,390       (32,162 )
Average deposits
    219,169       207,438       11,731       199,053       165,534       33,519  
Average invested capital
    21,372       25,170       (3,798 )     21,455       23,845       (2,390 )
Return on average assets
    1.56 %     2.01 %  
(45) b.p.
      1.27 %     2.12 %  
(85) b.p.
 
Return on invested capital
    21.62 %     26.12 %  
(450) b.p
      17.55 %     28.54 %  
(1,099) b.p.
 
Efficiency ratio
    72.48 %     56.90 %  
1,558 b.p.
      76.76 %     55.96 %  
2,081 b.p.
 
Net charge-offs (annualized) to average loans
    0.01 %     0.25 %  
(24) b.p.
      (0.03 %)     0.46 %  
(50) b.p.
 


Financial Condition

Securities

We maintain a securities portfolio to enhance profitability, support interest rate risk management strategies, provide liquidity and comply with regulatory requirements.  Securities are classified as held for investment, available for sale or trading.  See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of June 30, 2010.

Investment (held-to-maturity) securities, which consist primarily of Oklahoma municipal bonds and Texas school construction bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts.  At June 30, 2010, investment securities were carried at $353 million and had a fair value of $364 million.

The Company added $43 million to its investment securities portfolio during the second quarter of 2010 comprised primarily of qualifying school construction bonds.  The bonds were issued with the Company’s assistance by several school districts in our Texas market under a program authorized by the U.S. Treasury Department.  Interest on these bonds is primarily payable through federal income tax credits.

Available for sale securities, which may be sold prior to maturity, are carried at fair value.  Unrealized gains or losses, less deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity.  The amortized cost of available for sale securities totaled $9.0 billion at June 30, 2010, up $215 million over March 31, 2010.  At June 30, 2010, residential mortgage-backed securities represented 97% of total available for sale securities.  We hold no securities backed by sub-prime mortgage loans, collateralized debt obligations or collateralized commercial real estate loans.


 
- 24 -

 

A primary risk of holding mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates.  We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security.  Currently rates are historically low and prices for mortgage-backed securities are historically high resulting in very low effective durations.  The estimated expected duration of the residential mortgage-backed securities portfolio was approximately 0.25 years at June 30, 2010.  Management estimates that the expected duration would extend to approximately 3.5 years assuming an immediate 300 basis point upward rate shock.

In this environment, management uses the modified duration as it presents a more realistic duration / risk profile of the residential mortgage-backed securities portfolio.  The current modified duration of the residential mortgage-backed securities portfolio is 2.5 years and this would extend to 4.1 years assuming an immediate 300 basis point upward shock.  The modified duration contracts to 1.6 years assuming a 50 basis point decline in the current low rate environment.

Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans.  We mitigate this risk by primarily investing in securities issued by U.S. government agencies.  Principal and interest payments on the underlying loans are fully guaranteed.  At June 30, 2010, approximately $7.9 billion of the amortized costs of the Company’s residential mortgage-backed securities were issued by U.S. government agencies.   The fair value of these mortgage-backed securities totaled $8.2 billion at June 30, 2010.

We also hold amortized cost of $849 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions.  The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $736 million at June 30, 2010.   Approximately $594 million of these privately issued residential mortgage-backed securities were rated below investment grade by at least one of the nationally-recognized rating agencies.  The unrealized loss on the below investment grade mortgage-backed securities totaled $106 million at June 30, 2010.  The amortized cost of our privately issued residential mortgage-backed securities decreased $60 million from March 31, 2010 primarily due to cash received.  The unrealized loss on these securities decreased $30 million in the second quarter of 2010.

Our portfolio of privately issued residential mortgage-backed securities consists primarily of amortized cost of $619 million of Jumbo-A residential mortgage loans and $230 million of Alt-A residential mortgage loans.  Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums.  Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards.  Credit risk on residential mortgage-backed securities originated by private issuers is mitigated by investment in senior tranches with additional collateral support.  None of these securities are backed by sub-prime mortgage loans, collateralized debt obligations or collateralized loan obligations.  Approximately 89% of our Alt-A residential mortgage-backed securities are credit enhanced with additional collateral support and 100% of our Alt-A residential mortgage-backed securities originated in 2007 and 2006 have additional collateral support.  Approximately 83% of our Alt-A mortgage-backed securities represents pools of fixed-rate mortgage loans.  None of the adjustable rate mortgages are payment option adjustable rate mortgages (“ARMs”).  Approximately 27% of our Jumbo-A residential mortgage backed securities represent pools of fixed rate residential mortgage loans and none of the ARMs are payment option ARMs.

The aggregate gross amount of unrealized losses on available for sale securities totaled $122 million at June 30, 2010.  On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the consolidated financial statements.  Other-than-temporary impairment charges of $2.6 million were recognized in earnings in the second quarter of 2010 on certain privately issued residential mortgage backed securities we do not intend to sell.

Certain government agency issued residential mortgage-backed securities, identified as mortgage trading securities, have been designated as economic hedges of mortgage servicing rights.  These securities are carried at fair value with changes in fair value recognized in current period income.  These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights.

We also maintain a separate trading portfolio with the intent to sell at a profit for the Company that is also carried at fair value with changes in fair value recognized in current period income.


 
- 25 -

 

Bank-Owned Life Insurance

We have approximately $250 million of bank-owned life insurance at June 30, 2010.  This investment is expected to provide a long-term source of earnings to support existing employee benefit programs.  Approximately $219 million is held in separate accounts.  Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities.  The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines.  The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments.  At June 30, 2010, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $235 million.  As the underlying fair value of the investments held in a separate account at June 30, 2010 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap.  The stable value wrap is provided by a highly-rated, domestic financial institution.  The remaining cash surrender value of $31 million primarily represented the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.

Loans

The aggregate loan portfolio before allowance for loan losses totaled $10.9 billion at June 30, 2010, an $89 million decrease since March 31, 2010.

Table 17 - Loans
                             
(In thousands)
                             
   
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
   
2010
   
2010
   
2009
   
2009
   
2009
 
Commercial:
                             
  Energy
  $ 1,844,643     $ 1,892,306     $ 1,911,994     $ 2,093,802     $ 2,203,558  
  Services
    1,669,069       1,741,924       1,807,824       1,768,454       1,884,097  
  Wholesale/retail
    964,440       873,170       921,830       940,258       1,027,532  
  Manufacturing
    357,671       395,964       404,061       442,729       496,496  
  Healthcare
    805,619       777,668       792,538       745,777       765,285  
  Agriculture
    147,700       155,410       160,549       156,997       157,759  
  Other commercial and industrial
    222,386       178,297       209,044       222,039       181,124  
      Total commercial
    6,011,528       6,014,739       6,207,840       6,370,056       6,715,851  
                                         
Commercial real estate:
                                       
  Construction and land development
    545,659       605,667       645,295       735,196       818,837  
  Retail
    392,910       408,936       423,260       409,775       413,789  
  Office
    466,939       463,995       463,316       488,564       490,044  
  Multifamily
    346,460       377,673       360,436       339,847       306,175  
  Industrial
    176,535       181,117       146,707       127,845       129,239  
  Other real estate loans
    412,406       406,460       452,420       459,108       453,609  
      Total commercial real estate
    2,340,909       2,443,848       2,491,434       2,560,335       2,611,693  
                                         
Residential mortgage:
                                       
  Permanent mortgage
    1,320,408       1,303,589       1,303,340       1,348,183       1,362,505  
  Home equity
    513,838       494,122       490,282       481,641       471,470  
      Total residential mortgage
    1,834,246       1,797,711       1,793,622       1,829,824       1,833,975  
                                         
Consumer:
                                       
  Indirect automobile
    338,147       396,280       454,508       516,062       582,380  
  Other consumer
    357,887       318,646       332,294       335,287       326,029  
      Total consumer
    696,034       714,926       786,802       851,349       908,409  
                                         
  Total
  $ 10,882,717     $ 10,971,224     $ 11,279,698     $ 11,611,564     $ 12,069,928  

 
 
The decline in outstanding loan balances was broadly distributed among the various segments of the portfolio and across geographic markets.  Generally, the decline in outstanding loans balances was due to reduced customer demand in response to current economic conditions, normal repayment trends and management decisions to mitigate credit risk by exiting certain loan types.  A breakdown by geographical market follows on Table 18.

 
- 26 -

 


Table 18 – Loans by Principal Market
                             
(In thousands)
                             
                               
   
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
   
2010
   
2010
   
2009
   
2009
   
2009
 
Oklahoma:
                             
Commercial
  $ 2,704,460     $ 2,616,086     $ 2,649,252     $ 2,738,217     $ 2,918,478  
Commercial real estate
    784,549       787,543       820,578       815,362       855,742  
Residential mortgage
    1,257,497       1,235,788       1,228,822       1,245,917       1,249,104  
Consumer
    395,274       404,570       451,829       483,369       521,431  
Total Oklahoma
    5,141,780       5,043,987       5,150,481       5,282,865       5,544,755  
                                         
Texas:
                                       
Commercial
    1,902,934       1,935,819       2,017,081       2,075,379       2,182,756  
Commercial real estate
    731,399       769,682       735,338       734,742       741,199  
Residential mortgage
    308,496       307,643       313,113       335,797       345,780  
Consumer
    160,377       160,449       170,062       188,374       196,752  
Total Texas
    3,103,206       3,173,593       3,235,594       3,334,292       3,466,487  
                                         
New Mexico:
                                       
Commercial
    286,555       326,203       341,802       344,910       380,378  
Commercial real estate
    294,425       298,197       305,061       344,988       313,190  
Residential mortgage
    87,549       85,629       86,415       88,271       90,944  
Consumer
    20,542       16,713       17,473       18,176       18,826  
Total New Mexico
    689,071       726,742       750,751       796,345       803,338  
                                         
Arkansas:
                                       
Commercial
    89,376       86,566       103,443       99,559       97,676  
Commercial real estate
    114,576       129,125       132,436       128,984       133,026  
Residential mortgage
    15,823       17,071       16,849       19,128       19,015  
Consumer
    96,189       110,123       124,265       136,461       152,620  
Total Arkansas
    315,964       342,885       376,993       384,132       402,337  
                                         
Colorado:
                                       
Commercial
    484,188       495,916       545,724       569,549       595,858  
Commercial real estate
    225,758       228,998       239,970       249,879       269,923  
Residential mortgage
    69,325       68,049       66,504       68,667       58,557  
Consumer
    18,548       17,991       17,362       18,272       14,097  
Total Colorado
    797,819       810,954       869,560       906,367       938,435  
                                         
Arizona:
                                       
Commercial
    204,326       209,019       199,143       219,330       215,540  
Commercial real estate
    163,374       202,192       227,249       257,169       262,607  
Residential mortgage
    78,890       68,015       65,047       57,304       58,265  
Consumer
    2,971       3,068       3,461       4,826       3,229  
Total Arizona
    449,561       482,294       494,900       538,629       539,641  
                                         
Kansas / Missouri:
                                       
Commercial
    339,689       345,130       351,395       323,112       325,165  
Commercial real estate
    26,828       28,111       30,802       29,211       36,006  
Residential mortgage
    16,666       15,516       16,872       14,740       12,310  
Consumer
    2,133       2,012       2,350       1,871       1,454  
Total Kansas / Missouri
    385,316       390,769       401,419       368,934       374,935  
                                         
Total BOK Financial loans
  $ 10,882,717     $ 10,971,224     $ 11,279,698     $ 11,611,564     $ 12,069,928  


 
- 27 -

 

Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint.  Commercial loans are underwritten individually and represent on-going relationships based on a thorough knowledge of the customer, the customer’s industry and market.   While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interests in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the on-going cash flow from operations of the customer’s business.  Inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

The commercial loan portfolio decreased $3.2 million during the second quarter of 2010 to $6.0 billion at June 30, 2010.  The change in outstanding commercial loans was primarily related to a $91 million increase in wholesale/retail sector loans, a $44 million increase in other commercial and industrial loans and a $28 million increase in healthcare sector loans.  These increases were primarily offset by a $73 million decrease in service sector loans. Commercial loan origination activity has slowed to less than amounts necessary to offset normal repayment trends in the portfolio.  In general, loan demand has softened due to lower working capital needs and less capital project spending by our customers.  The commercial sector of our loan portfolio is distributed as follows in Table 19.

Table 19 – Commercial Loans by Principal Market
(In thousands)
   
Oklahoma
   
Texas
   
New Mexico
   
Arkansas
   
Colorado
   
Arizona
   
Kansas/
Missouri
   
Total
 
                                                 
  Energy
  $ 934,931     $ 679,741     $ 40     $ 4,997     $ 216,382     $ 1,873     $ 6,679     $ 1,844,643  
  Services
    515,813       532,843       199,346       19,095       173,594       111,096       117,282       1,669,069  
  Wholesale/retail
    443,992       341,176       24,740       57,761       20,112       49,684       26,975       964,440  
  Manufacturing
    200,997       77,337       35,851       1,449       20,470       17,456       4,111       357,671  
  Healthcare
    510,799       210,473       9,307       5,046       47,462       21,874       658       805,619  
  Agriculture
    19,106       8,671       66       277       210             119,370       147,700  
  Other commercial
     and industrial
    78,822       52,693       17,205       751       5,958       2,343       64,614       222,386  
      Total commercial loans
  $ 2,704,460     $ 1,902,934     $ 286,555     $ 89,376     $ 484,188     $ 204,326     $ 339,689     $ 6,011,528  
 
 
We have always been an energy lender.  Accordingly, loans to energy producers and borrowers related to the energy industry are the largest portion of our commercial loan portfolio.  In addition, energy production and related industries have a significant impact on the economy in our primary markets.  Loans collateralized by oil and gas properties are subject to a semi-annual engineering review by our internal staff of petroleum engineers.  This review is utilized as the basis for developing the expected cash flows supporting the loan amount.  The projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties.  Loans are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current pricing levels and with existing conventional equipment and operating methods and costs.  As part of our evaluation of credit quality, we analyze rigorous stress tests over a range of commodity prices and take proactive steps to mitigate risk when appropriate.

Energy loans totaled $1.8 billion or 17% of total loans.  Outstanding energy loans decreased $48 million during the second quarter of 2010 primarily due to low customer loan demand as a result of low commodity prices which has led to curtailed exploration and production of oil and gas reserves and reduced borrowing capacity based upon collateral values.  Approximately $1.5 billion of energy loans were to oil and gas producers, down $20 million from March 31, 2010.  Approximately 52% of the committed production loans are secured by properties primarily producing oil and 48% of the committed production loans are secured by properties primarily producing natural gas.  The energy category also included approximately $45 million of loans to borrowers that provide services to the energy industry, $219 million of loans to borrowers engaged in wholesale or retail energy sales and $40 million of loans to borrowers that manufacture equipment primarily for the energy industry.  We do not expect a significant, direct impact from the moratorium on offshore drilling activities on our energy loan portfolio.

 
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The services sector of the loan portfolio totaled $1.7 billion or 15% of total loans and consists of a large number of loans to a variety of businesses, including communications, gaming and transportation services.  Approximately $973 million of the services category is made up of loans with individual balances of less than $10 million.  Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business.  Loans in this sector may also be secured by personal guarantees of the owners or related parties.  Outstanding loans to the service sector of the loan portfolio decreased $73 million during the second quarter of 2010 due to reduced loan demand as a result of general economic conditions.

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers.  Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants.  At June 30, 2010, the outstanding principal balance of these loans totaled $1.5 billion.  Substantially all of these loans are to borrowers with local market relationships.  We serve as the agent lender in approximately 18% of our shared national credits, based on dollars committed.  We hold shared credits to the same standard of analysis and perform the same level of review as internally originated credits.  Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint.  We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured.  The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates.  As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $2.3 billion or 22% of the loan portfolio at June 30, 2010.  Over the past five years, the percentage of commercial real estate loans to our total loan portfolio ranged from 20% to 23%.   The outstanding balance of commercial real estate loans decreased $103 million from the previous quarter end.  The commercial real estate sector of our loan portfolio is distributed as follows in Table 20.

 Table 20 – Commercial Real Estate Loans by Principal Market
(In thousands)
   
Oklahoma
   
Texas
   
New Mexico
   
Arkansas
   
Colorado
   
Arizona
   
Kansas/
Missouri
   
Total
 
Construction and land development
  $ 154,684     $ 131,849     $ 71,196     $ 15,041     $ 122,285     $ 45,843     $ 4,761     $ 545,659  
 Retail
    147,917       117,964       57,962       19,045       7,282       31,246       11,494       392,910  
 Office
    112,367       163,094       78,947       17,558       64,148       30,387       438       466,939  
 Multifamily
    119,234       144,442       20,414       41,662       4,853       9,241       6,614       346,460  
 Industrial
    70,605       70,851       21,648       439       1,060       11,864       68       176,535  
 Other real estate loans
    179,742       103,199       44,258       20,831       26,130       34,793       3,453       412,406  
Total commercial real estate loans
  $ 784,549     $ 731,399     $ 294,425     $ 114,576     $ 225,758     $ 163,374     $ 26,828     $ 2,340,909  
 
 
Construction and land development loans, which consist primarily of residential construction properties and developed building lots, decreased $60 million from March 31, 2010 to $546 million at June 30, 2010 primarily due to payments.  In addition, approximately $4.4 million of construction and land development loans were transferred to other real estate owned in the second quarter of 2010 and $5.6 million were charged-off.  This sector of the loan portfolio is expected to continue to decrease as construction projects currently in process are completed.  Loans secured by multifamily residential properties decreased $31 million primarily in the Texas and Arkansas markets and loans secured by retail facilities decreased $16 million, primarily in the Arizona market.

 
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Residential Mortgage and Consumer

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home.  Residential mortgage loans are secured by a first or second-mortgage on the customer’s primary residence.  Consumer loans include direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as other unsecured loans.  Consumer loans also include indirect automobile loans made through primary dealers.  Residential mortgage and consumer loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.

Residential mortgage loans totaled $1.8 billion, up $37 million from March 31, 2010.  Permanent 1-4 family mortgage loans were up $17 million over the prior quarter primarily in the Oklahoma and Arizona markets and home equity loans increased $20 million, primarily in the Oklahoma market.  In general, we sell the majority of our conforming fixed-rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans.  We have no concentration in sub-prime residential mortgage loans.  Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market.

The permanent mortgage loan portfolio is primarily composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals.  The aggregate outstanding balance of loans in these programs is $1.2 billion.  Jumbo loans may be fixed or variable rate and are fully amortizing.  The size of jumbo loans exceed maximums set under government sponsored entity standards, but otherwise generally conform to those standards.  These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38%.  Loan-to-value ratios (“LTV”) are tiered from 60% to 100%, depending on the market.  Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain health-care professionals.  Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.  The maximum loan amount of any of our residential mortgage loans products is $4 million.

Approximately $103 million or 8% of permanent mortgage loans consist of first lien, fixed rate residential mortgage loans originated under various community development programs.  The outstanding balance of these loans is down from $106 million at March 31, 2010.  These loans were underwritten to standards approved by various U.S. government agencies under these programs and include full documentation.  However, these loans do have a higher risk of delinquency and losses given default than traditional residential mortgage loans.  The initial maximum LTV of loans in these programs was 103%.

The composition of residential mortgage and consumer loans at June 30, 2010 is as follows in Table 21.

Table 21 – Residential Mortgage and Consumer Loans by Principal Market
(In thousands)
   
Oklahoma
   
Texas
   
New Mexico
   
Arkansas
   
Colorado
   
Arizona
   
Kansas/
Missouri
   
Total
 
Permanent mortgage
  $ 942,141     $ 220,729     $ 19,078     $ 11,156     $ 49,152     $ 65,645     $ 12,507     $ 1,320,408  
Home equity
    315,356       87,767       68,471       4,667       20,173       13,245       4,159       513,838  
Total residential mortgage
  $ 1,257,497     $ 308,496     $ 87,549     $ 15,823     $ 69,325     $ 78,890     $ 16,666     $ 1,834,246  
                                                                 
Consumer:
                                                               
Indirect automobile
  $ 198,729     $ 49,194     $     $ 90,224     $     $     $     $ 338,147  
Other consumer
    196,545       111,183       20,542       5,965       18,548       2,971       2,133       357,887  
Total consumer
  $ 395,274     $ 160,377     $ 20,542     $ 96,189     $ 18,548     $ 2,971     $ 2,133     $ 696,034  
 
 
Indirect automobile loans decreased $58 million from March 31, 2010, primarily due to the previously-disclosed decision by the Company to exit the business in the first quarter of 2009 in favor of a customer-focused direct lending approach.

 
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Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business.  These arrangements included unfunded loan commitments which totaled $4.9 billion and standby letters of credit which totaled $552 million at June 30, 2010.  Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors.  Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party.  Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Approximately $3.9 million of the outstanding standby letters of credit were issued on behalf of customers whose loans are non-performing at June 30, 2010.

We also have off-balance sheet commitments for residential mortgage loans sold with full or partial recourse as more fully described in Note 14 to the consolidated financial statements.  At June 30, 2010, the principal balance of residential mortgage loans sold subject to recourse obligations totaled $311 million, down from $324 million at March 31, 2010.  Substantially all of these loans are to borrowers in our primary markets including $219 million to borrowers in Oklahoma, $33 million to borrowers in Arkansas, $18 million to borrowers in New Mexico, $16 million to borrowers in the Kansas/Missouri area and $14 million to borrowers in Texas.

 
Customer Derivative Programs
 

We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates, or to take positions in derivative contracts.  Each of these programs work essentially the same way.  Derivative contracts are executed between the customers and the Company.  Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in commodity prices, interest rates or foreign exchange rates.  The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

The customer derivative programs create credit risk for potential amounts due to the Company from our customers and from the counterparties.  Customer credit risk is monitored through existing credit policies and procedures.  The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer.  Customers may also be required to provide margin collateral to further limit our credit risk.

Counterparty credit risk is evaluated through existing policies and procedures.  This evaluation considers the total relationship between BOK Financial and each of the counterparties.  Individual limits are established by management, approved by Credit Administration and reviewed by the Asset / Liability Committee.  Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits.  Based on declines in the counterparties’ credit ratings, these limits may be reduced and additional margin collateral may be required.

A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts.  This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or counterparty’s ability to provide margin collateral was impaired.

Derivative contracts are carried at fair value.  At June 30, 2010, the net fair values of derivative contracts reported as assets under these programs totaled $335 million, down slightly from $337 million at March 31, 2010.  At June 30, 2010, derivative contracts carried as assets included interest rate contracts with fair values of $153 million, energy contracts with fair values of $120 million, and foreign exchange contracts with fair values of $54 million.  The aggregate net fair values of derivative contracts held under these programs reported as liabilities totaled $338 million.


 
- 31 -

 

At June 30, 2010, total derivative assets were reduced by $7.9 million of cash collateral received from counterparties and total derivative liabilities were reduced by $39 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement as permitted by generally accepted accounting principles.

A table showing the notional and fair value of derivative assets and liabilities on both a gross and net basis is presented in Note 3 to the Consolidated Financial Statements (Unaudited).

The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at June 30, 2010 follows in Table 22.


Table 22 – Fair Value of Derivative Contracts
     
(In thousands)
     
       
Customers
  $ 176,107  
Energy companies
    60,396  
Banks and other financial institutions
    73,330  
Exchanges
    16,080  
Other
    826  
Fair value of customer hedge asset derivative contracts, net
  $ 326,739  

The largest net amount due from a single counterparty, a domestic subsidiary of a major energy company, at June 30, 2010 was $54 million.  This amount was offset by $46 million in letters of credit issued by multiple independent financial institutions.   At June 30, 2010, we had a $1.7 million credit exposure to BP North America Inc., an approved counterparty of the Company.

Our customer derivative program also introduces liquidity and capital risk.  We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits.  Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets.  These risks are modeled as part of the management of these programs.  Based on current prices, a decrease in market prices equivalent to $10 per barrel of oil would increase the fair value of derivative assets by $370 million.  An increase in prices equivalent to $137 per barrel of oil would decrease the fair value of derivative assets by $267 million as current prices move away from the fixed prices embedded in our existing contracts.  Further increases in prices equivalent to $144 per barrel of oil would increase the fair value of our derivative assets by $309 million.  Liquidity requirements of this program are also affected by our credit rating.  A decrease in credit rating from A1 to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $45 million.
 
 

 
- 32 -

 

Summary of Loan Loss Experience

We maintain separate reserves for loan losses and reserves for off-balance sheet credit risk.  The combined allowance for loan losses and reserve for off-balance sheet credit losses totaled $315 million or 2.89% of outstanding loans and 98% of nonaccruing loans at June 30, 2010.  The allowance for loan losses was $300 million and the reserve for off-balance sheet credit losses was $15 million.  At March 31, 2010, the combined allowance for loan losses and off-balance sheet credit losses was $314 million or 2.86% of outstanding loans and 91% of nonaccruing loans.

Table 23 – Summary of Loan Loss Experience
                             
(In thousands)
                             
   
Three Months Ended
 
   
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
   
2010
   
2010
   
2009
   
2009
   
2009
 
Reserve for loan losses:
                             
Beginning balance
  $ 299,717     $ 292,095     $ 280,902     $ 263,309     $ 251,002  
 Loans charged off:
                                       
       Commercial
    6,030       11,373       12,773       12,026       9,135  
       Commercial real estate
    19,439       22,357       12,505       17,407       17,186  
       Residential mortgage
    8,804       1,842       6,055       3,479       5,373  
       Consumer
    3,895       4,756       6,641       5,669       5,715  
       Total
    38,168       40,328       37,974       38,581       37,409  
Recoveries of loans previously charged off:
                                       
       Commercial
    958       3,063       640       858       692  
       Commercial real estate
    94       672       317       20       83  
       Residential mortgage
    127       120       335       201       179  
       Consumer
    1,435       1,995       1,658       1,515       1,518  
       Total
    2,614       5,850       2,950       2,594       2,472  
Net loans charged off
    35,554       34,478       35,024       35,987       34,937  
Provision for loan losses
    35,326       42,100       46,217       53,580       47,244  
Ending balance
  $ 299,489     $ 299,717     $ 292,095     $ 280,902     $ 263,309  
Reserve for off-balance sheet credit losses:
                                       
Beginning balance
  $ 14,388     $ 14,388     $ 11,985     $ 10,445     $ 10,569  
Provision for off-balance sheet credit losses
    714             2,403       1,540       (124 )
Ending balance
  $ 15,102     $ 14,388     $ 14,388     $ 11,985     $ 10,445  
Total provision for credit losses
  $ 36,040     $ 42,100     $ 48,620     $ 55,120     $ 47,120  
                                         
Reserve for loan losses to loans outstanding at period-end
    2.75 %     2.73 %     2.59 %     2.42 %     2.18 %
Net charge-offs (annualized) to average loans
    1.30       1.23       1.22       1.21       1.13  
Total provision for credit losses (annualized) to average loans
    1.31       1.51       1.69       1.85       1.52  
Recoveries to gross charge-offs
    6.85       14.51       7.77       6.72       6.61  
Reserve for loan losses as a multiple of net charge-offs (annualized)
    2.11 x     2.17 x     2.08 x     1.95 x     1.88 x
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments
    0.28 %     0.26 %     0.26 %     0.22 %     0.19 %
Combined reserves for credit losses to loans outstanding at period-end
    2.89       2.86       2.72       2.52       2.27  


Allowance for Loan Losses

The adequacy of the allowance for loan losses is assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio.  The allowance consists of specific reserves attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general reserves based on migration factors and non-specific reserves based on general economic, risk concentration and related factors.  An independent Credit Administration department is responsible for performing this evaluation for the entire company to ensure that the methodology is applied consistently.  For the three months ended June 30, 2010, there have been no material changes in the approach or techniques utilized in developing the allowance for loan losses.

 
- 33 -

 

Specific reserves for impaired loans are determined by evaluation of estimated future cash flows, collateral value or historical statistics.  Loans are considered to be impaired when it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan agreement.  This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status.  Generally, all nonaccruing commercial and commercial real estate loans are considered impaired.  Substantially all impaired loans are collateralized.  Collateral includes real property, inventory, accounts receivable, operating equipment, interests in mineral rights, and other property.  Collateral may also include personal guaranties by borrowers and related parties.

Delinquency status is not a significant consideration in the evaluation of impairment or risk-grading of commercial or commercial real estate loans.  These evaluations are based on an assessment of the borrowers’ paying capacity and attempt to identify changes in credit risk before payments become delinquent.  Changes in the delinquency trends of residential mortgage loans and consumer loans may indicate increases or decreases in expected losses.

Impaired loans are charged-off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower based on a quarterly evaluation of available cash resources or collateral value.  Collateral value of real property is generally based on third party appraisals that conform to Uniform Standards of Professional Appraisal Practice, less estimated selling costs.  Appraised values are on an “as is” basis and are not adjusted by us.  Collateral value of mineral rights is generally determined by our internal staff of engineers based on projected cash flows from proven oil and gas reserves under existing economic and operating conditions.  The value of other collateral is generally determined by our special assets staff based on projected liquidation cash flows under current market conditions.  Collateral values and available cash resources that support impaired loans are evaluated quarterly.  Updated appraisals are obtained at least annually, or more frequently if market conditions indicate collateral values may have declined.  The excess of the outstanding principal balance over the fair value of collateral, less estimated selling costs, and available cash resources of the borrower is charged-off against the allowance for loan losses.

No reserves are attributed to the remaining balance of loans that have been charged-down to amounts management expects to recover.  However, the remaining balance continues to be classified as nonaccruing until full recovery of principal and interest, including the charged-off portion of the loan, is probable.

Impaired loans totaled $293 million at June 30, 2010 and $311 million at March 31, 2010.  At June 30, 2010, $203 million of impaired loans had specific reserves of $20 million and $90 million had no specific reserves because they had been charged down to amounts we expect to recover.  Impaired loans with no specific reserves had gross outstanding principal balances of $187 million.  Cumulative life-to-date charge-offs of impaired loans with no specific reserves at June 30, 2010 totaled $97 million, including $18 million charged-off in the second quarter of 2010.  At March 31, 2010, $186 million of impaired loans had specific reserves of $12 million and $125 million had no specific reserves because they had been charged down to amounts we expect to recover.

General reserves for unimpaired loans are based on migration models.  Separate migration models are used to determine general reserves for commercial and commercial real estate loans, residential mortgage loans, and consumer loans.  All commercial and commercial real estate loans are risk-graded based on an evaluation of the borrowers’ ability to repay the loans.  Risk grades are updated quarterly.  Migration factors are determined for each risk-grade to determine the inherent loss based on historical trends.  We use an eight-quarter aggregate accumulation of net losses as a basis for the migration factors.  Losses incurred in more recent periods are more heavily weighted by a sum-of-periods-digits formula.  The higher of current loss factors based on migration trends or a minimum migration factor based upon long-term history is assigned to each risk grade.

Migration models fairly measure loss exposure during an economic cycle.  However, because they are based on historic trends, their accuracy is limited near the beginning or ending of a cycle.  Because of this limitation, the results of the migration models are evaluated by management quarterly.  The resulting general reserve may be adjusted upward or downward so that the allowance for loan losses fairly represents credit losses inherent in the loan portfolio.

The general reserve for residential mortgage loans is based on an eight-quarter average percent of loss.  The general reserve for consumer loans is based on an eight-quarter average percent of loss with separate migration factors determined by major product line, such as indirect automobile loans and direct consumer loans.


 
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The aggregate amount of general reserves determined by migration factors for all unimpaired loans totaled $260 million at June 30, 2010.  Approximately, $204 million was attributed to commercial and commercial real estate loans, $40 million was attributed to residential mortgage loans and $16 million was attributed to consumer loans.  The aggregate amount of general reserves determined by migration factors for all unimpaired loans totaled $265 million at March 31, 2010.

Nonspecific reserves are maintained for risks beyond factors specific to a particular loan or identified by the migration models.  These factors include trends in the economy in our primary lending areas, conditions in certain industries where we have a concentration and overall growth in the loan portfolio.  Evaluation of nonspecific factors considers the effect of the duration of the business cycle on migration factors.  Nonspecific factors also consider current economic conditions and other relevant factors.  Nonspecific reserves totaled $19 million at June 30, 2010 and $23 million at March 31, 2010.

The provision for loan losses is the amount necessary to maintain the allowance for loan losses at an amount determined by management to be adequate based on its evaluation.  The provision for loan losses totaled $36.0 million for the second quarter of 2010, $42.1 million for the first quarter of 2010 and $47.1 million for the second quarter of 2009.  Factors considered in determining the provision for credit losses for the second quarter of 2010 included trends of net charge-offs, nonperforming loans and risk grading.

Net Loans Charged-Off
Loans are charged off against the allowance for loan losses when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value.  Collateral values are generally evaluated annually, or more frequently for certain collateral types or collateral located in certain distressed markets.  Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified.

Net loans charged off during the second quarter of 2010 totaled $35.6 million compared to $34.5 million in the previous quarter and $34.9 million in the second quarter of 2009.  The ratio of net loans charged off (annualized) to average outstanding loans was 1.30% for the second quarter of 2010 compared 1.23% for the first quarter of 2010 compared with 1.13% for the second quarter of 2009.  Net loans charged off in the second quarter of 2010 increased $1.1 million compared to the previous quarter.  Gross loans charged off in the second quarter of 2010 decreased $2.2 million compared to the previous quarter, offset by a $3.2 million decrease in recoveries in the second quarter of 2010 compared to the first quarter of 2010.

Net loans charged off by category and principal market area during the second quarter of 2010 follow in Table 24.

Table 24 – Net Loans Charged Off
(In Thousands)
   
Oklahoma
   
Texas
   
Colorado
   
Arkansas
   
New
Mexico
   
Arizona
   
Kansas/
Missouri
   
Total
 
                                                 
Commercial
  $ 2,193     $ 2,065     $ 513     $ (1 )   $ 28     $ 274     $     $ 5,072  
Commercial real estate
    8,845       1,323       2,232       1,822       655       4,468             19,345  
Residential mortgage
    7,763       591       111       1       168       43             8,677  
Consumer
    1,059       690       173       386       144       (2 )     10       2,460  
Total net loans charged off
  $ 19,860     $ 4,669     $ 3,029     $ 2,208     $ 995     $ 4,783     $ 10     $ 35,554  

Net commercial loans charged off during the second quarter of 2010 decreased $3.2 million compared to the prior quarter.  Net commercial loans charged off during the second quarter of 2010 included $2.5 million of charge-offs from the services sector in the Texas, Arizona and Colorado markets and $1.8 million healthcare sector of the loan portfolio primarily in the Oklahoma and Texas markets.

Net charge-offs of commercial real estate loans decreased $2.3 million over the first quarter of 2010.  Net commercial real estate loans charged off during the second quarter of 2010 included $8.8 million of loans secured by multifamily residential properties attributed to the Oklahoma market.  A single condominium and commercial office project comprised $8.7 million of this amount.  Land and residential construction sector charge-offs totaled $6.3

 
- 35 -

 

million in the second quarter of 2010, a $2.6 million increase from the prior quarter.  Land and residential construction sector loan portfolio charge-offs were primarily composed of $2.5 million in the Arizona market, $2.2 million in the Colorado market and $1.3 million in the Texas market.  

Residential mortgage net charge-offs increased $7.0 million compared to the previous quarter primarily related to residential mortgage loans attributed to the Oklahoma market.  The timing of residential mortgage loan charge-offs varies based on foreclosure activity and delinquency status.  Consumer loan net charge-offs, which includes indirect auto loan and deposit account overdraft losses, decreased $301 thousand over the previous quarter.  Net charge-offs of indirect auto loans decreased to $938 thousand for the second quarter of 2010 compared to $1.6 million for the first quarter of 2010.

The Company considers the credit risk from loan commitments and letters of credit in its evaluation of the adequacy of the reserve for loan losses.  A separate reserve for off-balance sheet credit risk is maintained.  Table 23 presents the trend of reserves for off-balance sheet credit losses and the relationship between the reserve and loan commitments.  The provision for credit losses included the combined charge to expense for both the reserve for loan losses and the reserve for off-balance sheet credit losses.  All losses incurred from lending activities will ultimately be reflected in charge-offs against the reserve for loan losses following funds advanced against outstanding commitments and after the exhaustion of collection efforts.

 
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Nonperforming Assets

Table 25 – Nonperforming Assets
                             
(In thousands)
                             
   
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
   
2010
   
2010
   
2009
   
2009
   
2009
 
Nonaccrual loans:
                             
   Commercial
  $ 82,775     $ 84,491     $ 101,384     $ 128,266     $ 126,510  
   Commercial real estate
    193,698       219,639       204,924       212,418       189,586  
   Residential mortgage
    40,033       36,281       29,989       38,220       35,860  
   Consumer
    3,188       3,164       3,058       3,897       1,037  
   Total nonaccrual loans
    319,694       343,575       339,355       382,801       352,993  
Renegotiated loans (2)
    21,327       17,763       15,906       17,426       17,479  
   Total nonperforming loans
    341,021       361,338       355,261       400,227       370,472  
Other nonperforming assets
    119,908       121,933       129,034       89,507       75,243  
   Total nonperforming assets
  $ 460,929     $ 483,271     $ 484,295     $ 489,734     $ 445,715  
Nonaccrual loans by principal market:
                                       
    Oklahoma
  $ 93,898     $ 102,231     $ 83,176     $ 112,610     $ 108,490  
    Texas
    49,695       58,067       66,892       65,911       51,582  
    New Mexico
    26,956       23,021       26,693       35,541       29,640  
    Arkansas
    10,933       14,652       13,820       5,911       3,888  
    Colorado (3)
    66,040       66,883       60,082       50,432       45,794  
    Arizona
    72,111       78,656       84,559       108,161       106,076  
    Kansas / Missouri
    61       65       4,133       4,235       7,523  
    Total nonaccrual loans
  $ 319,694     $ 343,575     $ 339,355     $ 382,801     $ 352,993  
Nonaccrual loans by loan portfolio sector:
                                       
    Commercial:
                                       
          Energy
  $ 26,259     $ 17,182     $ 22,692     $ 48,992     $ 53,842  
          Manufacturing
    3,237       4,834       15,765       17,429       16,975  
          Wholesale / retail
    5,561       6,629       12,057       7,623       10,983  
          Agriculture
    58       65       65       98       105  
          Services
    31,062       35,535       30,926       30,094       24,713  
          Healthcare
    8,568       10,538       13,103       13,758       14,222  
          Other
    8,030       9,708       6,776       10,272       5,670  
               Total commercial
    82,775       84,491       101,384       128,266       126,510  
    Commercial real estate:
                                       
          Land development and construction
    132,686       140,508       109,779       113,868       97,425  
          Retail
    4,967       14,843       26,236       22,254       17,474  
          Office
    24,764       26,660       25,861       31,406       27,685  
          Multifamily
    7,253       15,725       26,540       28,223       27,827  
          Industrial
    4,223             279       527       527  
          Other commercial real estate
    19,805       21,903       16,229       16,140       18,648  
               Total commercial real estate
    193,698       219,639       204,924       212,418       189,586  
    Residential mortgage:
                                       
           Permanent mortgage
    37,978       34,134       28,314       36,431       34,149  
           Home equity
    2,055       2,147       1,675       1,789       1,711  
                Total residential mortgage
    40,033       36,281       29,989       38,220       35,860  
    Consumer
    3,188       3,164       3,058       3,897       1,037  
    Total nonaccrual loans
  $ 319,694     $ 343,575     $ 339,355     $ 382,801     $ 352,993  
Ratios:
                                       
Reserve for loan losses to nonperforming loans
    87.82 %     82.95 %     82.22 %     70.19 %     71.07 %
Nonperforming loans to period-end loans
    3.13       3.29       3.15       3.45       3.07  
Loans past due (90 days or more)  (1)
  $ 12,474     $ 12,915     $ 10,308     $ 24,238     $ 32,479  
                                         
(1) Includes residential mortgages guaranteed by agencies of the U.S. Government.
  $ 3,210     $ 3,183     $ 1,400     $ 2,589     $ 1,337  
(2) Includes residential mortgages guaranteed by agencies of the U.S. Government.  These loans have been modified to extend payment terms and/or reduce interest rates to current market.
    17,598       14,083       12,799       11,234       11,079  
(3) Includes loans subject to First United Bank sellers escrow for any losses incurred during a three-year period after the June 2007 which expired in the second quarter of 2010.
          4,281       4,311       4,173       8,305  

 
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Nonperforming assets totaled $461 million or 4.19% of outstanding loans and repossessed assets at June 30, 2010, down $22 million since March 31, 2010.  In addition to $320 million of nonaccruing loans, nonperforming assets included $21 million of renegotiated residential mortgage loans and $120 million of real estate and other repossessed assets.  The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to increase.

Renegotiated loans represent troubled debt restructurings of residential mortgage loans.  Generally, we modify residential mortgage loans by reducing interest rates and extending the number of payments.  We do not forgive principle or unpaid interest.  At June 30, 2010, approximately $13 million of the renegotiated residential mortgage loans are currently performing in accordance with the modified terms, $4.6 million are 30 to 89 days past due and $3.6 million are past due 90 days or more.  Restructured residential mortgage loans guaranteed by agencies of the U.S. government in accordance with agency guidelines represent $18 million of our $21 million portfolio of renegotiated loan.  Interest continues to accrue on these guaranteed loans based on the modified terms of the loan.  Renegotiated loans may be transferred to loans held-for-sale after a period of satisfactory performance, generally at least nine months.  If it becomes probable that we will not be able to collect all amounts due according to the modified loan terms, the loan is placed on nonaccrual status and included in nonaccrual loans.  Approximately $2.3 million of renegotiated loans have not met the modified terms and are reported as nonaccruing residential mortgage loans.

Commercial and commercial real estate loans are considered distressed when it becomes probable that we will not collect the full contractual principal and interest.  All distressed commercial and commercial real estate loans are placed on nonaccrual status.  We may modify loans to distressed borrowers generally consisting of extension of payment terms, not to exceed the final contractual maturity date of the original loan.  We do not forgive principal or accrued but unpaid interest nor do we grant interest rate concessions.  We do not modify consumer loans to troubled borrowers.

A rollforward of nonperforming assets for the first quarter of 2010 follows in Table 26.

Table 26 – Rollforward of Nonperforming Assets
(In thousands)
   
For the Three Months Ended June 30, 2010
 
   
 
Nonaccruing Loans
   
 
Renegotiated Loans
   
Real Estate and Other Repossessed Assets
   
Total Nonperforming Assets
 
Balance, March 31, 2010
  $ 343,575     $ 17,763     $ 121,933     $ 483,271  
Additions
    58,038                   58,038  
Payments
    (17,815 )                 (17,815 )
Charge-offs / Write-offs
    (38,168 )           (11,623 )     (49,791 )
Foreclosures
    (18,667 )           18,667        
Sales
                (9,149 )     (9,149 )
Return to accrual
    (5,282 )                 (5,282 )
Other, net
    (1,987 )     3,564       80       1,657  
Balance, June 30, 2010
  $ 319,694     $ 21,327     $ 119,908     $ 460,929  


   
For the Six Months Ended June 30, 2010
 
   
 
Nonaccruing Loans
   
 
Renegotiated Loans
   
Real Estate and Other Repossessed Assets
   
Total Nonperforming Assets
 
Balance, December 31, 2009
  $ 339,355     $ 15,906     $ 129,034     $ 484,295  
Additions
    138,888                   138,888  
Payments
    (50,623 )                 (50,623 )
Charge-offs / Write-offs
    (78,496 )           (17,560 )     (96,056 )
Foreclosures
    (24,769 )           24,769        
Sales
                (16,670 )     (16,670 )
Return to accrual
    (8,883 )                 (8,883 )
Other, net
    4,222       5,421       335       9,978  
Balance, June 30, 2010
  $ 319,694     $ 21,327     $ 119,908     $ 460,929  

 
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Nonaccruing loans may be returned to accrual status when full collection of contractual principal and interest, including principal previously charged-off, is probable based on improvements in the borrower’s financial condition and a sustained period of performance.

The distribution of nonaccruing loans among our various markets follows in Table 27.

Table 27 – Nonaccruing Loans by Principal Market
(Dollars In thousands)
   
June 30, 2010
   
March 31, 2010
   
Change
 
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
 
Oklahoma
  $ 93,898       1.83 %   $ 102,231       2.03 %   $ (8,333 )     (20 ) bp
Texas
    49,695       1.60       58,067       1.83       (8,372 )     (23 )
New Mexico
    26,956       3.91       23,021       3.17       3,935       74  
Arkansas
    10,933       3.46       14,652       4.27       (3,719 )     (81 )
Colorado
    66,040       8.28       66,883       8.25       (843 )     3  
Arizona
    72,111       16.04       78,656       16.31       (6,545 )     (27 )
Kansas / Missouri
    61       0.02       65       0.02       (4 )      
Total
  $ 319,694       2.94 %   $ 343,575       3.13 %   $ (23,881 )     (19 ) bp

Nonaccruing loans attributed to the Arizona, Colorado and Texas markets consisted primarily of commercial real estate loans.  Nonaccruing loans attributed to the Oklahoma market are primarily composed of $42 million of commercial loans, $27 million of residential mortgage loans and $24 million of commercial real estate loans.

Nonaccruing loans decreased $24 million from March 31, 2010 primarily due to an $8.4 million decrease in nonaccruing loans attributed to the Texas market, an $8.3 million decrease in nonaccruing loans attributed to the Oklahoma market and a $6.5 million decrease in nonaccruing loans attributed to the Arizona market.  During the second quarter of 2010, $58 million of new nonaccruing loans were identified, offset by $18 million in payments received, $38 million in charge-offs and $19 million in foreclosures and repossessions.  In addition, $5 million of nonaccruing loans were returned to accrual status during the second quarter of 2010 based on our expectation of full repayment.  The ratio of nonaccruing loans to period end loans was also negatively impacted by an $89 million decrease in period end loans balances from March 31, 2010.

Commercial

Nonaccruing commercial loans totaled $83 million or 1.38% of total commercial loans at June 30, 2010 and $84 million or 1.40% of total commercial loans at March 31, 2010.  At June 30, 2010, nonaccruing commercial loans were primarily composed of $31 million or 1.86% of total services sector loans, $26 million or 1.42% of total energy sector loans, $9 million or 1.06% of total healthcare sector loans and $8 million or 3.61% of other commercial and industrial sector loans.  Nonaccruing commercial loans decreased $1.7 million primarily due to a $9 million increase in energy sector loans offset by decreases in nonaccruing loans in all other sectors.  Nonaccruing service sector loans declined $4 million from March 31, 2010.

Newly identified nonaccruing commercial loans in the second quarter of 2010 totaled approximately $20 million, offset primarily by $8 million in payments and $6 million in charge-offs and $5 million of nonaccruing commercial loans returning to accrual status.  Newly identified nonaccrual loans were primarily in the services and other commercial and industrial sectors of the portfolio.  Nonaccruing commercial loans attributed to our various markets as of June 30, 2010 follows in Table 28.


 
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Table 28 – Nonaccruing Commercial Loans by Principal Market
(Dollars in thousands)

   
June 30, 2010
   
March 31, 2010
   
Change
 
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
 
Oklahoma
  $ 41,758       1.54 %   $ 36,110       1.38 %   $ 5,648       16 bp
Texas
    11,398       0.60       17,450       0.90       (6,052 )     (30 )
New Mexico
    8,398       2.93       8,873       2.72       (475 )     21  
Arkansas
    103       0.12       839       0.97       (736 )     (85 )
Colorado
    8,314       1.72       9,429       1.90       (1,115 )     (18 )
Arizona
    12,743       6.24       11,725       5.61       1,018       63  
Kansas / Missouri
    61       0.02       65       0.02       (4 )      
Total commercial
  $ 82,775       1.38 %   $ 84,491       1.40 %   $ (1,716 )     (2 ) bp


Commercial Real Estate

Nonaccruing commercial real estate loans totaled $194 million or 8.27% of outstanding commercial real estate loans at June 30, 2010 compared to $220 million or 8.99% of outstanding commercial real estate loans at March 31, 2010.  Nonaccruing commercial real estate loans continue to be largely concentrated in land development and residential construction loans.  Nonaccruing commercial real estate loans decreased $26 million from March 31, 2010.  Newly identified nonaccruing commercial real estate loans totaled $19 million, offset by $19 million of charge-offs, $16 million of foreclosures and $10 million of cash payments received.  Nonaccruing commercial real estate loans attributed to our geographic market follows in Table 29.

Table 29 – Nonaccruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
   
June 30, 2010
   
March 31, 2010
   
Change
 
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
 
Oklahoma
  $ 23,797       3.03 %   $ 38,666       4.91 %   $ (14,689 )     (188 ) bp
Texas
    31,150       4.26       33,811       4.39       (2,661 )     (13 )
New Mexico
    16,410       5.57       12,370       4.15       4,040       142  
Arkansas
    9,532       8.32       12,643       9.79       (3,111 )     (147 )
Colorado
    56,880       25.20       57,362       25.05       (482 )     15  
Arizona
    55,929       34.23       64,787       32.04       (8,858 )     219  
Kansas / Missouri
                                   
Total commercial real estate
  $ 193,698       8.27 %   $ 219,639       8.99 %   $ (25,941 )     (72 ) bp

Nonaccruing commercial real estate loans are primarily concentrated in the Arizona and Colorado markets.  Approximately $57 million or 25% of commercial real estate loans in the Colorado market are nonaccruing, primarily consisting of nonaccruing residential construction and land development loans.  Nonaccruing commercial real estate loans in the Colorado market were largely unchanged from March 31, 2010.  Approximately $56 million or 34% of commercial real estate loans in Arizona are nonaccruing and consist primarily of $27 million of nonaccruing residential construction and land development loans, $12 million of nonaccruing loans secured by other commercial and industrial facilities and $10 million of nonaccruing loans secured by office buildings.  Nonaccruing commercial real estate in the Arizona market decreased $9 million from March 31, 2010, primarily due to charge-offs and transfers to other real estate owned.

The decrease in nonaccruing commercial real estate loans included $10 million decrease in nonaccruing loans secured by retail facilities primarily in the Arizona market, an $8 million decrease in nonaccruing residential construction and land development loans and an $8 million decrease in loans secured by multifamily residential properties primarily in the Oklahoma market.  Decrease in nonaccruing loans were partially offset by a $4 million increase in nonaccruing loans secured by industrial facilities related to a single loan in the Arizona market.

 
- 40 -

 


Residential Mortgage and Consumer

Nonaccruing residential mortgage loans totaled $40 million or 2.18% of outstanding residential mortgage loans at June 30, 2010 compared to $36 million or 2.02% of outstanding residential loans at March 31, 2010.  Nonaccruing residential mortgage loans primarily consist of permanent residential mortgage loans which totaled $38 million or 2.88% of outstanding residential mortgage loans at June 30, 2010, a $3.8 million increase compared to March 31, 2010.  Nonaccruing home equity loans continued to perform well with only $2.1 million or 0.40% of total home equity loans in nonaccrual status.

The distribution of nonaccruing residential mortgage loans attributed to our various markets is included in Table 30.

Table 30 – Nonaccruing Residential Mortgage Loans by Principal Market
(Dollars in thousands)
 
 
June 30, 2010
   
March 31, 2010
   
Change
 
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
   
Amount
   
% of outstanding loans
 
Oklahoma
  $ 27,447       2.18 %   $ 26,463       2.14 %   $ 984       4 bp
Texas
    6,489       2.10       5,951       1.93       538       17  
New Mexico
    2,049       2.34       1,761       2.06       288       28  
Arkansas
    81       0.51                   81       51  
Colorado
    655       0.94       91       0.13       564       81  
Arizona
    3,312       4.20       2,015       2.96       1,297       124  
Kansas / Missouri
                                   
Total residential mortgage loans
  $ 40,033       2.18 %   $ 36,281       2.02 %   $ 3,752       16 bp

In addition to nonaccruing residential mortgage and consumer loans and renegotiated residential mortgage loans, payments of residential mortgage loans and consumer loans may be delinquent.  The composition of residential mortgage and consumer loans past due is included in the following Table 31.  Residential mortgage loans 30 to 89 days past due increased $34 thousand and residential mortgage loans past due 90 days or more increased $170 thousand during second quarter of 2010.   Consumer loans past due 30 to 89 days decreased $1.8 million from March 31, 2010 due to a $936 thousand decrease in indirect automobile loans and an $898 thousand decrease in other consumer loans.  Consumer loans past due 90 days or more decreased $79 thousand in the second quarter of 2010, due primarily to a decrease in other consumer loans.

Table 31 – Residential Mortgage and Consumer Loans Past Due
(In thousands)
   
June 30, 2010
   
March 31, 2010
 
   
90 Days or More
   
30 to 89 Days
   
90 Days or More
   
30 to 89 Days
 
                         
   Permanent mortgage
  $ 3,400     $ 23,508     $ 3,183     $ 22,649  
   Home equity
          919       47       1,744  
Total residential mortgage
  $ 3,400     $ 24,427     $ 3,230     $ 24,393  
                                 
Consumer:
                               
   Indirect automobile
  $ 306     $ 14,059     $ 287     $ 14,995  
   Other consumer
    118       1,934       216       2,832  
Total consumer
  $ 424     $ 15,993     $ 503     $ 17,827  


 
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Real Estate and Other Repossessed Assets

Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans.  The assets are carried at the lower of cost, which is determined by fair value at date of foreclosure, or current fair value less estimated selling costs.  The fair value of real property is generally based on third party appraisals that conform to Uniform Standards of Professional Appraisal Practice.  Appraisals are ordered at foreclosure and are updated on no less than an annual basis.  For certain property types, such as residential building lots, or in certain distressed markets, we may request updated appraisals more frequently.  Appraised values are on an “as is” basis and are not adjusted.  For uncompleted properties, we may also obtain appraised value for properties on an “as completed” basis to use in determination of whether to develop properties to completion and costs may be capitalized not to exceed the estimated “as completed” fair value as determined by the independent real estate appraisal.  Mineral rights are generally determined by our internal staff of engineers based on projected cash flows from proven oil and gas reserves under existing economic and operating conditions.  The value of other assets is generally determined by our special assets staff based on projected liquidation cash flows under current market conditions.

The carrying value of real estate and other repossessed assets is evaluated by management on a quarterly basis, including our consideration of marketing activity of our properties and sales of competing properties.

Real estate and other repossessed assets totaled $120 million at June 30, 2010, a decrease of $2.0 million from March 31, 2010 including a $5.1 million decrease of 1-4 family residential properties and residential land development properties attributed to the Arizona market.  The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 32 following.

Table 32 – Real Estate and Other Repossessed Assets by Principal Market
 (In thousands)
   
Oklahoma
   
Texas
   
Colorado
   
Arkansas
   
New
Mexico
   
Arizona
   
Kansas/
Missouri
   
Total
 
1-4 family residential properties and residential land development properties
  $ 5,936     $ 19,860     $ 2,893     $ 5,859     $ 1,895     $ 20,468     $ 686     $ 57,597  
Developed commercial real estate properties
    5,046       4,584       2,009       2,155       4,905       18,161             36,860  
Equity interest in partial satisfaction of debts
    13,100                                           13,100  
Undeveloped land
          315       2,218       11             5,142             7,686  
Construction equipment
                                        3,311       3,311  
Vehicles
    531       333             281                         1,145  
Other
                209                               209  
Total real estate and other repossessed assets
  $ 24,613     $ 25,092     $ 7,329     $ 8,306     $ 6,800     $ 43,771     $ 3,997     $ 119,908  

Undeveloped land is primarily zoned for commercial development.  Developed commercial real estate properties are primarily completed with no additional construction necessary for sale.  A secondary market is developing for shares of the entity in which we hold an equity interest.  Prices indicated in that market exceed our carrying value per share.

Our loan review process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral.  Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets.  Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms.  These potential problem loans totaled $194 million at June 30, 2010 and $231 million at March 31, 2010.  Potential problem loans by primary industry included real estate - $112 million, energy - $19 million, manufacturing - $18 million, and services - $18 million.  Potential problem real estate loans included $36 million of residential development loans on properties primarily located in Texas and Oklahoma and $26 million of loans secured by multifamily residential properties primarily located in Texas.

 
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Liquidity and Capital

Subsidiary Banks

Deposits and borrowed funds are the primary sources of liquidity for the subsidiary banks.  Based on the average balances for the second quarter of 2010, approximately 68% of our funding was provided by deposit accounts, 18% from borrowed funds, 2% from long-term subordinated debt and 10% from shareholders’ equity.  Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Deposit accounts represent our largest funding source.  We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience.  Retail deposit growth is supported through our Perfect Banking sales and customer service program, free checking and online bill paying services, an extensive network of branch locations and ATMs and a 24-hour Express Bank call center.  Commercial deposit growth is supported by offering treasury management and lockbox services.  We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.
 
 
Average deposits totaled $15.8 billion at June 30, 2010 and represented approximately 68% of total average liabilities and capital for the second quarter of 2010 compared with $15.4 billion at March 31, 2010 and approximately 65% of total average liabilities and capital for the first quarter of 2010.  Average deposits increased $441 million over the first quarter of 2010.   Average interest-bearing transaction deposit accounts continued to grow in the second quarter of 2010, up $324 million over the first quarter of 2010.  Growth in our average interest-bearing transaction deposit accounts included $196 million of commercial deposits, $78 million of consumer banking deposits and $47 million of wealth management deposits.  Average demand deposits decreased $175 million from the first quarter of 2010, including $85 million of commercial deposits, $57 million of consumer banking deposits and $26 million of wealth management deposits.  Higher-costing average time deposits also decreased $71 million during the second quarter of 2010.  Brokered deposits, which are included in time deposits, averaged $170 million for the second quarter of 2010, unchanged from the first quarter of 2010.

The distribution of deposit accounts among our principal markets is shown in Table 33.

 
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Table 33 – Deposits by Principal Market Area
                             
(In thousands)
                             
   
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
   
2010
   
2010
   
2009
   
2009
   
2009
 
Oklahoma:
                             
Demand
  $ 2,101,994     $ 2,062,084     $ 2,068,908     $ 1,895,980     $ 1,451,057  
Interest-bearing:
                                       
Transaction
    5,562,287       5,237,983       5,134,902       4,566,058       4,374,089  
Savings
    102,590       101,708       93,006       93,443       94,048  
Time
    1,442,525       1,360,756       1,397,240       1,765,980       2,033,312  
Total interest-bearing
    7,107,402       6,700,447       6,625,148       6,425,481       6,501,449  
Total Oklahoma
    9,209,396       8,762,531       8,694,056       8,321,461       7,952,506  
                                         
Texas:
                                       
Demand
    1,150,495       1,068,656       1,108,401       1,138,794       1,002,266  
Interest-bearing:
                                       
Transaction
    1,674,519       1,675,759       1,748,319       1,716,460       1,660,642  
Savings
    36,814       37,175       35,129       35,724       33,992  
Time
    1,003,936       1,043,813       1,100,602       1,007,579       1,035,919  
Total interest-bearing
    2,715,269       2,756,747       2,884,050       2,759,763       2,730,553  
Total Texas
    3,865,764       3,825,403       3,992,451       3,898,557       3,732,819  
                                         
New Mexico:
                                       
Demand
    223,869       222,685       209,090       216,330       175,033  
Interest-bearing:
                                       
Transaction
    491,708       480,189       444,247       424,528       434,498  
Savings
    30,231       20,036       17,563       18,039       18,255  
Time
    476,155       495,243       510,202       511,507       542,388  
Total interest-bearing
    998,094       995,468       972,012       954,074       995,141  
Total New Mexico
    1,221,963       1,218,153       1,181,102       1,170,404       1,170,174  
                                         
Arkansas:
                                       
Demand
    14,919       17,599       21,526       19,077       17,261  
Interest-bearing:
                                       
Transaction
    108,104       61,398       50,879       85,061       73,972  
Savings
    1,288       1,266       1,346       1,131       1,031  
Time
    119,472       105,794       101,839       137,109       162,505  
Total interest-bearing
    228,864       168,458       154,064       223,301       237,508  
Total Arkansas
    243,783       186,057       175,590       242,378       254,769  
                                         
Colorado:
                                       
Demand
    143,783       136,048       146,929       121,555       113,895  
Interest-bearing:
                                       
Transaction
    441,085       456,508       448,846       477,418       445,521  
Savings
    18,869       18,118       17,802       18,518       18,144  
Time
    497,538       509,410       525,844       520,906       579,709  
Total interest-bearing
    957,492       984,036       992,492       1,016,842       1,043,374  
Total Colorado
    1,101,275       1,120,084       1,139,421       1,138,397       1,157,269  
                                         
Arizona:
                                       
Demand
    71,711       61,183       68,651       54,046       55,975  
Interest-bearing:
                                       
Transaction
    94,033       81,851       81,909       95,242       89,842  
Savings
    1,062       1,105       958       971       1,282  
Time
    63,643       64,592       60,768       56,809       59,775  
Total interest-bearing
    158,738       147,548       143,635       153,022       150,899  
Total Arizona
    230,449       208,731       212,286       207,068       206,874  
                                         
Kansas / Missouri:
                                       
Demand
    28,518       31,726       30,339       16,406       9,692  
Interest-bearing:
                                       
Transaction
    116,423       100,037       21,337       15,682       12,907  
Savings
    110       146       148       70       54  
Time
    69,819       74,648       71,498       84,923       158,325  
Total interest-bearing
    186,352       174,831       92,983       100,675       171,286  
Total Kansas / Missouri
    214,870       206,557       123,322       117,081       180,978  
                                         
Total BOK Financial deposits
  $ 16,087,500     $ 15,527,516     $ 15,518,228     $ 15,095,346     $ 14,655,389  

 
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In addition to deposits, subsidiary bank liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings.  Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions.  Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country.  The largest single source of Federal funds purchased totaled $200 million at June 30, 2010.  Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities.  Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family mortgage loans and multifamily mortgage loans).  During the second quarter of 2010, the outstanding balance of federal funds purchased averaged $1.4 billion, securities repurchase agreements averaged $1.1 billion and Federal Home Loan Bank borrowings averaged $1.6 billion.

At June 30, 2010, the estimated unused credit available to the subsidiary banks from collateralized sources within our internal policy limits was approximately $3.7 billion.

Parent Company

The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years.  Dividends are further restricted by minimum capital requirements.  Based on the most restrictive limitations as well as management’s internal capital policy, at June 30, 2010, the subsidiary banks could declare up to $210 million of dividends without regulatory approval.  Future losses or increases in required regulatory capital at the subsidiary banks could affect their ability to pay dividends to the parent company.

Effective December 2, 2009, the Company amended an unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder.  The terms of the amended credit agreement reduced the committed amount from $188 million to $100 million, changed the interest rate and facility fee to reflect current market terms and extended the maturity date from December 2, 2010 to December 2, 2012.  Interest on outstanding balances due to Mr. Kaiser is based on one-month LIBOR plus 250 basis points and is payable quarterly.  Additional interest in the form of a facility fee is paid quarterly on the unused portion of the commitment at 50 basis points.  Previously, interest was due quarterly based on one-month LIBOR plus 125 basis points and the facility fee was paid quarterly on the unused portion of the commitment at 25 basis points.  As with the original agreement, the amended agreement has no restrictive covenants.  No amounts were outstanding under this credit agreement as of June 30, 2010.

Our equity capital at June 30, 2010 was $2.4 billion, up from $2.3 billion at March 31, 2010.  Net income less cash dividend paid increased equity $47 million during the second quarter of 2010.  An increase in the fair value of available-for-sale securities was primarily responsible for a $66 million increase in accumulated other comprehensive income during the second quarter of 2010.  Capital is managed to maximize long-term value to the shareholders.  Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements.  Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends.

Based on asset size, we are the largest commercial bank that elected not to participate in the TARP Capital Purchase Program. The decision not to participate in TARP was based on an evaluation of our capital needs in both the current environment and in several capital stress environments. We considered capital requirements for organic growth and potential acquisitions, the cost of TARP capital and a defined exit strategy when the cost of TARP capital increases substantially at the end of year five.
 
 
On April 26, 2005, the Board of Directors authorized a share repurchase program, which replaced a previously authorized program.  The maximum of two million common shares may be repurchased.  The specific timing and amount of shares repurchased will vary based on market conditions, securities law limitations and other factors.  Repurchases may be made over time in open market or privately negotiated transactions.  The repurchase program may be suspended or discontinued at any time without prior notice.  Since this program began, 784,073 shares have been repurchased by the Company for $38.7 million.  No shares were repurchased in the second quarter of 2010.

BOK Financial and subsidiary banks are subject to various capital requirements administered by federal agencies.  Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations.  These capital requirements include

 
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quantitative measures of assets, liabilities, and off-balance sheet items.  The capital standards are also subject to qualitative judgments by the regulators.

For a banking institution to qualify as well capitalized, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively.  All of the Company’s banking subsidiaries exceeded the regulatory definitions of well capitalized.  The capital ratios for BOK Financial on a consolidated basis are presented in Table 34.

 
 
Table 34 – Capital Ratios
 
Well Capitalized
   
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
   
Minimums
   
2010
   
2010
   
2009
   
2009
   
2009
 
                                     
Average total equity to average assets
          10.15 %     9.69 %     9.48 %     9.26 %     8.70 %
Tangible common equity ratio
          8.88       8.46       7.99       7.78       7.55  
Tier 1 common equity ratio
          11.77       11.33       10.75       10.45       9.77  
Risk-based capital:
                                               
Tier 1 capital
    6.00 %     11.90       11.45       10.86       10.56       9.86  
Total capital
    10.00       15.38       15.09       14.43       14.10       13.34  
Leverage
    5.00       8.57       8.25       8.05       8.16       7.97  


Capital resources of financial institutions are also regularly measured by the tangible common shareholders’ equity ratio.  Tangible common shareholders’ equity is shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) less intangible assets and equity which does not benefit common shareholders.  Equity that does not benefit common shareholders includes preferred equity and equity provided by the U.S. Treasury’s TARP program.  Tier 1 common equity is tier 1 equity as defined by banking regulations, adjusted for other comprehensive income (loss) and equity which does not benefit common shareholders.  These non-GAAP measures are valuable indicators of a financial institution’s capital strength since it eliminates intangible assets from shareholders’ equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income (loss) in shareholders’ equity.

Table 35 following provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP.

Table 35 – Non-GAAP Measures
 
June 30,
   
March 31,
   
Dec. 31,
   
Sept. 30,
   
June 30,
 
(Dollars in thousands)
 
2010
   
2010
   
2009
   
2009
   
2009
 
                               
Tangible common equity ratio:
                             
Total shareholders' equity
  $ 2,428,738     $ 2,312,443     $ 2,205,813     $ 2,185,013     $ 2,050,572  
Less: Intangible assets, net
    351,592       352,916       354,239       356,152       357,838  
Tangible common equity
    2,077,146       1,959,527       1,851,574       1,828,861       1,692,734  
Total assets
    23,736,728       23,501,976       23,516,831       23,876,841       22,768,319  
Less: Intangible assets, net
    351,592       352,916       354,239       356,152       357,838  
Tangible assets
  $ 23,385,136     $ 23,149,060     $ 23,162,592     $ 23,520,689     $ 22,410,481  
Tangible common equity ratio
    8.88 %     8.46 %     7.99 %     7.78 %     7.55 %
                                         
Tier 1 common equity ratio:
                                       
Tier 1 capital
  $ 1,976,588     $ 1,922,783     $ 1,876,778     $ 1,849,254     $ 1,807,705  
Less: Non-controlling interest
    21,289       20,274       19,561       18,981       15,590  
Tier 1 common equity
    1,955,299       1,902,509       1,857,217       1,830,273       1,792,115  
Risk weighted assets
  $ 16,611,662     $ 16,787,566     $ 17,275,808     $ 17,515,147     $ 18,338,540  
Tier 1 common equity ratio
    11.77 %     11.33 %     10.75 %     10.45 %     9.77 %


Off-Balance Sheet Arrangements

Bank of Oklahoma agreed to guarantee rents totaling $28.7 million through September of 2017 to the City of Tulsa (“City”) as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building.  All rent payments are current and remaining guaranteed rents totaled $21.4 million at

 
- 46 -

 

June 30, 2010.  In return for this guarantee, Bank of Oklahoma will receive 80% of net cash flow as defined in an agreement with the City through September 2017 from currently vacant space in the same building.  Approximately 42 thousand square feet of this additional space has been rented to outside parties since the date of the agreement.  The maximum amount that Bank of Oklahoma may receive under this agreement is $4.5 million.

Market Risk

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument.  These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices.  Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.   Market risk excludes changes in fair value due to credit of the individual issuers of financial instruments.

BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets.  The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial.  BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates.  Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed.

The Asset / Liability Committee is responsible for managing market risk in accordance with policy guidelines established by the Board of Directors.  The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%.  These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for un-pledged assets, among other things.  Compliance with these guidelines is reviewed monthly.

Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model.  BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity.  A simulation model is used to estimate the effect of changes in interest rates over the next 12 and longer time periods based on multiple interest rate scenarios.  Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines.  The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 50 basis point decrease in interest rates.  Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in interest rates.  However, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful.

The decrease in intermediate and long-term interest rates during the second quarter of 2010 has increased the expected level of mortgage prepayments over the next 12 months thereby shortening the overall duration of assets and resulting in an asset sensitive position when compared to the relatively neutral position of the prior quarter.  If intermediate and long-term rates were to increase to levels seen in the early part of the second quarter, the asset sensitive position would move back towards neutral, absent other changes in the balance sheet or economic hedges.

The Company’s primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing.  Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights.  Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation.  The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior.  The impact of planned growth and new business activities is factored into the simulation model.  The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 36 due to the extreme volatility over such a large rate range.  The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in Note 6 to the Consolidated Financial Statements.


 
- 47 -

 

The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of re-pricing characteristics, future cash flows and customer behavior.  These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors.

 
Table 36 – Interest Rate Sensitivity
           
(Dollars in Thousands)
           
   
200 b.p. Increase
   
50 b.p. Decrease
 
   
2010
   
2009
   
2010
   
2009
 
Anticipated impact over the next twelve months on net interest revenue
  $ 27,480     $ (12,159 )   $ (13,795 )     ***  
      4.0 %     (1.5 )%     (2.0 )%     ***  
***A 50 basis point decrease was not computed in 2009.
 
Trading Activities
 
BOK Financial enters into trading activities both as an intermediary for customers and for its own account.  As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities, and municipal bonds.  These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions.  BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account.  These positions are taken with the objective of generating trading profits.  Both of these activities involve interest rate risk.

A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs.

Management uses a Value at Risk (“VAR”) methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes.   It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $7.4 million.  At June 30, 2010, the VAR was $1.0 million.  The greatest value at risk during the second quarter of 2010 was $9.0 million.
 
Controls and Procedures

As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.  As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company’s internal controls over financial reporting.  Based on that evaluation, there has been no such change during the quarter covered by this report.



 
- 48 -

 

Forward-Looking Statements

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general.  Words such as “anticipates,” “believes,” ”estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements.  Management judgments relating to and discussion of the provision and reserve for loan losses involve judgments as to expected events and are inherently forward-looking statements.  Assessments that BOK Financial’s acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements.  Internal and external factors that might cause such a difference include, but are not limited to:  (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans.  BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.


 
- 49 -

 


Consolidated Statements of Earnings (Unaudited)
                       
(In thousands, except share and per share data)
                       
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
Interest revenue
 
2010
   
2009
   
2010
   
2009
 
Loans
  $ 131,102     $ 143,054     $ 263,046     $ 286,420  
Residential mortgage loans held for sale
    2,177       3,215       3,924       5,593  
Taxable securities
    81,460       80,713       164,072       164,715  
Tax-exempt securities
    2,308       2,913       4,757       5,563  
   Total securities
    83,768       83,626       168,829       170,278  
Trading securities
    542       776       1,152       1,577  
Funds sold and resell agreements
    8       14       16       44  
Total interest revenue
    217,597       230,685       436,967       463,912  
Interest expense
                               
Deposits
    26,292       45,103       53,909       97,030  
Borrowed funds
    3,657       4,370       7,270       10,259  
Subordinated debentures
    5,535       5,632       11,101       11,198  
Total interest expense
    35,484       55,105       72,280       118,487  
Net interest revenue
    182,113       175,580       364,687       345,425  
Provision for credit losses
    36,040       47,120       78,140       92,160  
Net interest revenue after provision for credit losses
    146,073       128,460       286,547       253,265  
Other operating revenue
                               
Brokerage and trading revenue
    24,754       21,794       45,789       46,493  
Transaction card revenue
    28,263       27,533       53,950       52,961  
Trust fees and commissions
    17,737       16,860       34,057       33,370  
Deposit service charges and fees
    28,797       28,421       55,589       55,826  
Mortgage banking revenue
    18,335       19,882       33,206       38,380  
Bank-owned life insurance
    2,908       2,418       5,880       4,735  
Margin asset fees
    69       68       105       135  
Other revenue
    7,305       6,124       14,907       12,707  
Total fees and commissions
    128,168       123,100       243,483       244,607  
Gain on sales of assets
    1,545       973       155       1,116  
Gain (loss) on derivatives, net
    7,272       (1,037 )     6,931       (2,701 )
Gain on securities, net
    23,100       6,471       27,624       26,579  
Total other-than-temporary impairment losses
    (10,959 )     (1,263 )     (20,667 )     (55,631 )
Portion of loss recognized in other comprehensive income
    (8,313 )     279       (13,796 )     (39,087 )
Net impairment losses recognized in earnings
    (2,646 )     (1,542 )     (6,871 )     (16,544 )
Total other operating revenue
    157,439       127,965       271,322       253,057  
Other operating expense
                               
Personnel
    97,054       96,191       193,878       188,818  
Business promotion
    4,945       4,569       8,923       8,997  
Professional fees and services
    6,668       7,363       13,069       13,875  
Net occupancy and equipment
    15,691       15,973       31,202       32,231  
Insurance
    5,596       5,898       12,129       11,536  
FDIC special assessment
          11,773             11,773  
Data processing and communications
    21,940       20,452       42,249       39,758  
Printing, postage and supplies
    3,525       4,072       6,847       8,643  
Net losses and expenses of repossessed assets
    13,067       996       20,287       2,802  
Amortization of intangible assets
    1,323       1,686       2,647       3,372  
Mortgage banking costs
    10,380       9,336       19,647       16,803  
Change in fair value of mortgage servicing rights
    19,458       (7,865 )     5,526       (9,820 )
Other expense
    6,265       5,326       13,240       12,776  
Total other operating expense
    205,912       175,770       369,644       341,564  
Income before taxes
    97,600       80,655       188,225       164,758  
Federal and state income tax
    32,042       28,315       62,325       57,153  
Net income
    65,558       52,340       125,900       107,605  
Net income attributable to non-controlling interest
    2,036       225       2,245       458  
Net income attributable to BOK Financial Corp.
  $ 63,522     $ 52,115     $ 123,655     $ 107,147  
Earnings per share:
                               
Basic
  $ 0.93     $ 0.77     $ 1.82     $ 1.59  
Diluted
  $ 0.93     $ 0.77     $ 1.81     $ 1.58  
Average shares used in computation:
                               
Basic
    67,605,807       67,344,577       67,599,349       67,330,590  
Diluted
    67,880,587       67,448,029       67,835,606       67,417,874  
Dividends declared per share
  $ 0.25     $ 0.24     $ 0.49     $ 0.465  
See accompanying notes to consolidated financial statements.

 
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Consolidated Balance Sheets
                 
(In thousands except share data)
                 
   
June 30,
   
Dec. 31,
   
June 30,
 
   
2010
   
2009
   
2009
 
   
(Unaudited)
   
(Footnote 1)
   
(Unaudited)
 
Assets
                 
Cash and due from banks
  $ 834,972     $ 875,250     $ 470,553  
Funds sold and resell agreements
    17,554       45,966       112,128  
Trading securities
    62,159       65,354       84,548  
Securities:
                       
  Available for sale
    9,074,054       8,726,135       7,033,090  
  Available for sale securities pledged to creditors
    152,666       145,888       191,583  
  Investment (fair value:  June 30, 2010 – $363,886; December 31, 2009 - $246,704; June 30, 2009 – $273,770)
    353,277       240,405       269,844  
  Mortgage trading securities
    534,641       285,950       222,864  
    Total securities
    10,114,638       9,398,378       7,717,381  
Residential mortgage loans held for sale
    227,574       217,826       326,363  
Loans
    10,882,717       11,279,698       12,069,928  
Less reserve for loan losses
    (299,489 )     (292,095 )     (263,309 )
  Loans, net of reserve
    10,583,228       10,987,603       11,806,619  
Premises and equipment, net
    277,225       280,260       286,295  
Accrued revenue receivable
    126,149       108,822       118,718  
Goodwill
    335,601       335,601       335,829  
Intangible assets, net
    15,991       18,638       22,009  
Mortgage servicing rights, net
    98,942       73,824       67,413  
Real estate and other repossessed assets
    119,908       129,034       75,243  
Bankers’ acceptances
    2,885       3,869       8,260  
Derivative contracts
    334,576       343,782       462,971  
Cash surrender value of bank-owned life insurance
    251,857       247,357       241,792  
Receivable on unsettled securities trades
                237,200  
Other assets
    333,469       385,267       394,997  
Total assets
  $ 23,736,728     $ 23,516,831     $ 22,768,319  
                         
Noninterest-bearing demand deposits
  $ 3,735,289     $ 3,653,844     $ 2,825,179  
Interest-bearing deposits:
                       
  Transaction
    8,488,159       7,930,439       7,091,471  
  Savings
    190,964       165,952       166,806  
  Time (includes fair value: $27,957 at June 30, 2010; $98,031 at December 31, 2009; $520,245 at June 30, 2009)
    3,673,088       3,767,993       4,571,933  
  Total deposits
    16,087,500       15,518,228       14,655,389  
Funds purchased and repurchase agreements
    2,262,475       2,471,743       2,798,274  
Other borrowings
    1,708,295       2,133,357       2,152,177  
Subordinated debentures
    398,617       398,539       398,465  
Accrued interest, taxes and expense
    91,471       111,880       119,003  
Bankers’ acceptances
    2,885       3,869       8,260  
Derivative contracts
    299,851       308,360       445,463  
Due on unsettled securities trades
    266,470       212,335        
Other liabilities
    169,137       133,146       125,126  
Total liabilities
    21,286,701       21,291,457       20,702,157  
Shareholders' equity:
                       
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2010 – 70,616,414;  December 31, 2009 – 70,312,086; June 30, 2009 – 70,092,396)
    4       4       4  
Capital surplus
    769,928       758,723       747,624  
Retained earnings
    1,654,516       1,563,683       1,502,993  
Treasury stock (shares at cost:  June 30, 2010 – 2,535,617; December 31, 2009 – 2,509,279;  June 30, 2009 – 2,417,954)
    (109,481 )     (105,857 )     (101,601 )
Accumulated other comprehensive income (loss)
    113,771       (10,740 )     (98,448 )
Total shareholders’ equity
    2,428,738       2,205,813       2,050,572  
Non-controlling interest
    21,289       19,561       15,590  
Total equity
    2,450,027       2,225,374       2,066,162  
Total liabilities and equity
  $ 23,736,728     $ 23,516,831     $ 22,768,319  


See accompanying notes to consolidated financial statements.

 
- 51 -

 

Consolidated Statements of Changes in Equity (Unaudited)

(In thousands)
                                               
         
Accumulated
                                     
   
Common Stock
   
Other
Comprehensive
   
Capital
   
Retained
   
Treasury Stock
   
Total
Shareholders’
   
Non-
Controlling
   
Total
 
   
Shares
   
Amount
   
Income(Loss)
   
Surplus
   
Earnings
   
Shares
   
Amount
   
Equity
   
Interest
   
Equity
 
                                                             
Balances at December 31, 2008
    69,885     $ 4     $ (222,886 )   $ 743,411     $ 1,427,057       2,412     $ (101,329 )   $ 1,846,257     $ 13,855     $ 1,860,112  
Comprehensive income:
                                                                               
Net income attributable to BOKF
    -       -       -       -       107,147       -       -       107,147       -       107,147  
Net income attributable to non-controlling interest
    -       -       -       -       -       -       -       -       458       458  
Other comprehensive income, net of  tax
     -        -        124,438        -        -        -        -        124,438        -        124,438  
Comprehensive income
                                                            231,585       458       232,043  
Exercise of stock options
    207       -       -       2,048       -       6       (272 )     1,776       -       1,776  
Tax benefit on exercise of stock options
    -       -       -       (585 )     -       -       -       (585 )     -       (585 )
Stock-based compensation
    -       -       -       2,750       -       -       -       2,750       -       2,750  
Cash dividends on common stock
    -       -       -       -       (31,211 )     -       -       (31,211 )     -       (31,211 )
Capital calls and distributions, net
    -       -       -       -       -       -       -       -       1,277       1,277  
                                                                                 
Balances at June 30, 2009
    70,092     $ 4     $ (98,448 )   $ 747,624     $ 1,502,993       2,418     $ (101,601 )   $ 2,050,572     $ 15,590     $ 2,066,162  
                                                                                 
                                                                                 
Balances at December 31, 2009
    70,312     $ 4     $ (10,740 )   $ 758,723     $ 1,563,683       2,509     $ (105,857 )   $ 2,205,813     $ 19,561     $ 2,225,374  
Comprehensive income:
                                                                               
Net income attributable to BOKF
    -       -       -       -       123,655       -       -       123,655       -       123,655  
Net income attributable to non-controlling interest
    -       -       -       -       -       -       -       -       2,245       2,245  
Other comprehensive income, net of tax
    -       -       124,511       -       -       -       -       124,511       -       124,511  
Comprehensive income
                                                            248,166       2,245       250,411  
Exercise of stock options
    304       -       -       6,511       -       27       (3,624 )     2,887       -       2,887  
Tax benefit on exercise of stock options
    -       -       -       335       -       -       -       335       -       335  
Stock-based compensation
    -       -       -       4,359       -       -       -       4,359       -       4,359  
Cash dividends on common stock
    -       -       -       -       (32,822 )     -       -       (32,822 )     -       (32,822 )
Capital calls and distributions, net
    -       -       -       -       -       -       -       -       (517 )     (517 )
                                                                                 
Balances at June 30, 2010
    70,616     $ 4     $ 113,771     $ 769,928     $ 1,654,516       2,536     $ (109,481 )   $ 2,428,738     $ 21,289     $ 2,450,027  

See accompanying notes to consolidated financial statements.


 
- 52 -

 


Consolidated Statements of Cash Flows (Unaudited)
           
(In thousands)
           
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Cash Flows From Operating Activities:
           
Net income
  $ 125,900     $ 107,605  
Adjustments to reconcile net income before non-controlling interest to net cash
   provided by (used in) operating activities:
               
     Provision for credit losses
    78,140       92,160  
     Change in fair value of mortgage servicing rights
    5,526       (9,820 )
     Unrealized (gains) losses from derivatives
    (18,542 )     21,875  
     Tax benefit on exercise of stock options
    (335 )     585  
     Change in bank-owned life insurance
    (5,880 )     (4,786 )
     Stock-based compensation
    4,359       2,750  
     Depreciation and amortization
    30,843       28,761  
     Net (accretion) amortization of securities discounts and premiums
    44,240       6,119  
     Realized losses (gains) on financial instruments and other assets
    4,863       (40,771 )
     Mortgage loans originated for resale
    (818,282 )     (1,715,763 )
     Proceeds from sale of mortgage loans held for resale
    817,960       1,539,800  
     Capitalized mortgage servicing rights
    (10,362 )     (25,268 )
     Change in trading securities, including mortgage trading securities
    (250,268 )     157,809  
     Change in accrued revenue receivable
    (17,327 )     (22,045 )
     Change in other assets
    15,199       (119,836 )
     Change in accrued interest, taxes and expense
    (19,978 )     (14,217 )
     Change in other liabilities
    29,590       (7,441 )
Net cash provided by (used in) operating activities
    15,646       (2,483 )
Cash Flows From Investing Activities:
               
  Proceeds from maturities of investment securities
    61,275       35,147  
  Proceeds from maturities of available for sale securities
    1,121,309       1,290,008  
  Purchases of investment securities
    (174,255 )     (62,736 )
  Purchases of available for sale securities
    (2,346,997 )     (3,593,463 )
  Proceeds from sales of available for sale securities
    1,039,597       1,710,776  
  Loans originated or acquired net of principal collected
    302,180       682,167  
  Purchase of mortgage servicing rights
    (26,658 )      
  Proceeds from derivative asset contracts
    114,312       264,564  
  Proceeds from disposition of assets
    13,154       9,939  
  Purchases of assets
    (15,484 )     (25,435 )
  Net cash provided by investing activities
    88,433       310,967  
Cash Flows From Financing Activities:
               
  Net change in demand deposits, transaction deposits and savings accounts
    664,177       284,092  
  Net change in time deposits
    (94,090 )     (605,407 )
  Net change in other borrowings
    (634,330 )     402,998  
  Net payments or proceeds on derivative liability contracts
    (105,856 )     (301,580 )
  Net change in derivative margin accounts
    (26,889 )     (173,102 )
  Change in amount receivable (due) on unsettled security transactions
    54,135       2,274  
  Issuance of common and treasury stock, net
    2,887       1,776  
  Tax benefit on exercise of stock options
    335       (585 )
  Dividends paid
    (33,138 )     (31,211 )
Net cash used in financing activities
    (172,769 )     (420,745 )
Net decrease in cash and cash equivalents
    (68,690 )     (112,261 )
Cash and cash equivalents at beginning of period
    921,216       694,942  
Cash and cash equivalents at end of period
  $ 852,526     $ 582,681  
                 
Cash paid for interest
  $ 74,563     $ 141,757  
Cash paid for taxes
  $ 71,262     $ 70,919  
Net loans transferred to repossessed real estate and other assets
  $ 24,769     $ 57,119  
Accrued purchase of mortgage servicing rights
  $ 5,234     $  

See accompanying notes to consolidated financial statements.

 
- 53 -

 

Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BOK Financial Corporation (“BOK Financial” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries (“BOk”), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A., Bank of Kansas City, N.A., and BOSC, Inc.

The financial information should be read in conjunction with BOK Financial’s 2009 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements.  Amounts presented as of December 31, 2009 have been derived from the audited financial statements included in BOK Financial’s 2009 Form 10-K but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Operating results for the three-month and six-month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board

FASB Accounting Standards Update No. 2009-16, “Accounting for Transfers of Financial Assets” (“ASU 2009-16”)

ASU 2009-16 codifies Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment to Statement No. 140,” which amended Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. It also requires additional disclosures about all continuing involvement with transferred financial assets including information about gains and losses resulting from transfers during the period. ASU 2009-16 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

FASB Accounting Standards Update No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities” (“ASU 2009-17”)

ASU 2009-17 codifies Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” (“FAS 167”) which amended Financial Accounting Standards Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The standard requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. ASU 2009-17 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.


 
- 54 -

 

FASB Accounting Standards Update No. 2010-06, “Improving Disclosures About Fair Value Measurements” (“ASU 2010-06”)

ASU 2010-06 amends the Accounting Standards Codification (“ASC”) 820 to add new disclosure requirements about transfers into and out of Levels 1 and 2, as defined in ASC 820 and separate disclosures about purchases, sales, issuance and settlements relating to Level 3 measurements, as defined in ASC 820. It also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 was effective for the Company on January 1, 2010 with exception of the requirement to provide Level 3 activity of purchases, sales, issuances, and settlement on a gross basis, which will be effective for the Company on January 1, 2011. Early adoption is permitted.  ASU 2010-06 is not expected to have a significant impact on the Company’s financial statements.

FASB Accounting Standards Update No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”)

On February 24, 2010, the FASB issued ASU 2010-09, which amends FASB Accounting Standards Codification 855, “Subsequent Events,” to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures.  ASU 2010-09 added a definition of the term “SEC filer” and requires SEC filers and certain other entities to evaluate subsequent events through the date the financial statements are issued.  It also exempts SEC filers from disclosing the date through which subsequent events have been evaluated.  The guidance was effective for the Company on January 1, 2010.

FASB Accounting Standards Update No. 2010-10, “Amendments to Statement 167 for Certain Investment Funds” (“ASU 2010-10”)

On February 25, 2010, the FASB issued ASU 2010-10, which amends certain provisions of Statement 167 (codified in ASC 810-10).  The ASU defers the effective date of FAS 167 for reporting enterprise’s interest in certain entities and for certain money market mutual funds.  In addition, the ASU amends certain provisions of ASC 810-10 to change how a decision maker or service provider determines whether its fee is a variable interest.  ASU 2010-10 affects the Company’s evaluation of its involvement as administrator and investment advisor to Cavanal Hill money market funds and was effective for the Company as of January 1, 2010.

FASB Accounting Standards Update No. 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”)

On July 21, 2010, the FASB issued ASU 2010-20 which expands the disclosure requirements concerning the credit quality of an entity’s financing receivables and its allowance for credit losses.  ASU 2010-20 is effective for the Company as of December 31, 2010 and is not expected to have a significant impact on the Company’s financial statements.

 
- 55 -

 

(2) Securities

Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):

   
June 30,
 
   
2010
   
2009
 
               
Not Recognized in OCI (1)
               
Not Recognized in OCI (1)
 
   
Amortized
   
Fair
   
Gross Unrealized
   
Amortized
   
Fair
   
Gross Unrealized
 
   
Cost
   
Value
   
Gain
   
Loss
   
Cost
   
Value
   
Gain
   
Loss
 
                                                 
Municipal and other tax-exempt
  $ 221,702     $ 227,301     $ 5,640     $ (41 )   $ 263,393     $ 267,298     $ 4,357     $ (452 )
Other debt securities
    131,575       136,585       5,245       (235 )     6,451       6,472       21        
Total
  $ 353,277     $ 363,886     $ 10,885     $ (276 )   $ 269,844     $ 273,770     $ 4,378     $ (452 )

   
December 31, 2009
 
               
Not Recognized in OCI (1)
 
   
Amortized
   
Fair
   
Gross Unrealized
 
   
Cost
   
Value
   
Gain
   
Loss
 
                         
Municipal and other tax-exempt
  $ 232,568     $ 238,847     $ 6,336     $ (57 )
Other debt securities
    7,837       7,857       20        
Total
  $ 240,405     $ 246,704     $ 6,356     $ (57 )

(1) Other comprehensive income

The amortized cost and fair values of investment securities at June 30, 2010, by contractual maturity, are as shown in the following table (dollars in thousands):

                                 
Weighted
 
   
Less than
   
One to
   
Six to
   
Over
         
Average
 
   
One Year
   
Five Years
   
Ten Years
   
Ten Years
   
Total
   
Maturity²
 
                                     
Municipal and other tax-exempt:
                                   
Amortized cost
  $ 62,428     $ 122,424     $ 30,068     $ 6,782     $ 221,702       2.81  
Fair value
    62,895       126,366       31,088       6,952       227,301          
Nominal yield¹
    4.96       4.63       5.50       6.19       4.88          
Other debt securities:
                                               
Amortized cost
  $ 5,346     $ 24,762     $ 35,900     $ 65,567     $ 131,575       9.79  
Fair value
    5,346       24,704       35,821       70,714       136,585          
Nominal yield
    1.13       5.72       6.21       6.45       6.03          
Total fixed maturity securities:
                                               
Amortized cost
  $ 67,774     $ 147,186     $ 65,968     $ 72,349     $ 353,277       5.41  
Fair value
    68,241       151,070       66,909       77,666       363,886          
Nominal yield
    4.66       4.81       5.89       6.43       5.31          
Total investment securities:
                                               
Amortized cost
                                  $ 353,277          
Fair value
                                    363,886          
Nominal yield
                                    5.31          

¹
Calculated on a taxable equivalent basis using a 39% effective tax rate.
²
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.


 

 
- 56 -

 

 
Available for Sale Securities
 
The amortized cost and fair value of available for sale securities are as follows (in thousands):

   
June 30, 2010
 
               
Recognized in OCI (1)
 
                     
Other Than
 
   
Amortized
   
Fair
   
Gross Unrealized
   
Temporary
 
   
Cost
   
Value
   
Gain
   
Loss
   
Impairment
 
                               
Municipal and other tax-exempt
  $ 66,053     $ 66,439     $ 1,460     $ (1,074 )   $  
Residential mortgage-backed securities:
                                       
U. S. agencies:
                                       
FNMA
    4,148,758       4,319,324       174,183       (3,617 )      
FHLMC
    2,680,437       2,776,620       96,183              
GNMA
    972,348       1,011,522       40,707       (1,533 )      
Other
    107,564       116,253       8,689              
Total U.S. agencies
    7,909,107       8,223,719       319,762       (5,150 )      
Private issue:
                                       
Alt-A loans
    230,058       176,489             (1,350 )     (52,219 )
Jumbo-A loans
    619,415       559,027       1,536       (27,665 )     (34,259 )
Total private issue
    849,473       735,516       1,536       (29,015 )     (86,478 )
Total residential mortgage-backed securities
    8,758,580       8,959,235       321,298       (34,165 )     (86,478 )
Other debt securities
    12,971       13,064       120       (27 )      
Federal Reserve Bank stock
    32,844       32,844                    
Federal Home Loan Bank stock
    88,048       88,048                    
Perpetual preferred stock
    19,224       19,881       790       (133 )      
Equity securities and mutual funds
    33,561       47,209       14,170       (522 )      
Total
  $ 9,011,281     $ 9,226,720     $ 337,838     $ (35,921 )   $ (86,478 )
(1) Other comprehensive income

   
December 31, 2009
 
               
Recognized in OCI (1)
 
                     
Other Than
 
   
Amortized
   
Fair
   
Gross Unrealized
   
Temporary
 
   
Cost
   
Value
   
Gain
   
Loss
   
Impairment
 
                               
U.S. Treasury
  $ 6,998     $ 7,020     $ 22     $     $  
Municipal and other tax-exempt
    61,268       62,201       1,244       (311 )      
Residential mortgage-backed securities:
                                 
U. S. agencies:
                                       
FNMA
    3,690,280       3,782,180       98,764       (6,864 )      
FHLMC
    2,479,522       2,547,978       70,024       (1,568 )      
GNMA
    1,221,577       1,225,042       10,371       (6,906 )      
Other
    254,438       254,128       5,080       (5,390 )      
Total U.S. agencies
    7,645,817       7,809,328       184,239       (20,728 )      
Private issue:
                                       
Alt-A loans
    262,106       195,808             (13,305 )     (52,993 )
Jumbo-A loans
    699,272       596,554             (71,023 )     (31,695 )
Total private issue
    961,378       792,362             (84,328 )     (84,688 )
Total residential mortgage-backed securities
    8,607,195       8,601,690       184,239       (105,056 )     (84,688 )
Other debt securities
    17,174       17,147             (27 )      
Federal Reserve Bank stock
    32,526       32,526                    
Federal Home Loan Bank stock
    78,999       78,999                    
Perpetual preferred stock
    19,224       22,275       3,051              
Equity securities and mutual funds
    35,414       50,165       15,275       (524 )      
Total
  $ 8,858,798     $ 8,872,023     $ 203,831     $ (105,918 )   $ (84,688 )
(1) Other comprehensive income

 
- 57 -

 


   
June 30, 2009
 
               
Recognized in OCI (1)
 
                     
Other Than
 
   
Amortized
   
Fair
   
Gross Unrealized
   
Temporary
 
   
Cost
   
Value
   
Gain
   
Loss
   
Impairment
 
                               
U.S. Treasury
  $ 6,993     $ 7,073     $ 80     $     $  
Municipal and other tax-exempt
    42,423       43,009       617       (31 )      
Residential mortgage-backed securities:
                                       
U. S. agencies:
                                       
FNMA
    3,047,648       3,130,098       83,173       (723 )      
FHLMC
    1,951,564       2,003,808       54,280       (2,036 )      
GNMA
    447,287       451,516       5,318       (1,089 )      
Other
    199,025       204,297       6,302       (1,030 )      
Total U.S. agencies
    5,645,524       5,789,719       149,073       (4,878 )      
Private issue:
                                       
Alt-A loans
    357,037       254,424             (78,702 )     (23,911 )
Jumbo-A loans
    1,090,211       919,888             (170,323 )      
Total private issue
    1,447,248       1,174,312             (249,025 )     (23,911 )
Total residential mortgage-backed securities
    7,092,772       6,964,031       149,073       (253,903 )     (23,911 )
Other debt securities
    11,684       11,684                    
Federal Reserve Bank stock
    32,040       32,040                    
Federal Home Loan Bank stock
    115,368       115,368                    
Perpetual preferred stock
    19,224       16,317             (2,907 )      
Equity securities and mutual funds
    32,661       35,151       3,014       (524 )      
Total
  $ 7,353,165     $ 7,224,673     $ 152,784     $ (257,365 )   $ (23,911 )
(1) Other comprehensive income


 
- 58 -

 

The amortized cost and fair values of available for sale securities at June 30, 2010, by contractual maturity, are as shown in the following table (dollars in thousands):

                                 
Weighted
 
   
Less than
   
One to
   
Six to
   
Over
         
Average
 
   
One Year
   
Five Years
   
Ten Years
   
Ten Years6
   
Total
   
Maturity5
 
Municipal and other tax-exempt:
                                   
Amortized cost
  $ 340     $ 4,774     $ 15,668     $ 45,271     $ 66,053       19.24  
Fair value
    346       5,088       16,715       44,290       66,439          
Nominal yield¹
    4.60       3.97       4.02       1.09       2.01          
Other debt securities:
                                               
Amortized cost
  $ 29     $     $     $ 12,942     $ 12,971       30.24  
Fair value
    29                   13,035       13,064          
Nominal yield¹
    6.37                   1.44       1.45          
Total fixed maturity securities:
                                               
Amortized cost
  $ 369     $ 4,774     $ 15,668     $ 58,213     $ 79,024          
Fair value
    375       5,088       16,715       57,325       79,503          
Nominal yield
    4.74       3.97       4.02       1.17       1.92          
Mortgage-backed securities:
                                               
Amortized cost
                                  $ 8,758,580       ²  
Fair value
                                    8,959,235          
Nominal yield4
                                    4.21          
Equity securities and mutual funds:
                                               
Amortized cost
                                  $ 173,677       ³  
Fair value
                                    187,982          
Nominal yield
                                    2.07          
Total available-for-sale securities:
                                               
Amortized cost
                                  $ 9,011,281          
Fair value
                                    9,226,720          
Nominal yield
                                    4.14          

¹
Calculated on a taxable equivalent basis using a 39% effective tax rate.
²
The average expected lives of mortgage-backed securities were 2.92 years based upon current prepayment assumptions.
³
Primarily restricted common stock of U.S. government agencies and preferred stock of corporate issuers with no stated maturity.
4
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
5
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
6
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days.

Sales of available for sale securities resulted in gains and losses as follows (in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Proceeds
  $ 594,990     $ 862,188     $ 915,138     $ 1,772,631  
Gross realized gains
    8,469       13,287       13,826       38,372  
Gross realized losses
                       
Related federal and state income tax expense
    2,778       4,664       4,576       13,315  

Gains and losses on sales of available for sale securities are realized on settlement date.


 
- 59 -

 


Temporarily Impaired Securities as of June 30, 2010
                       
(In thousands)
                       
   
Number
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Securities
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
Investment:
                                         
Municipal and other tax exempt
    13     $ 5,606     $ 31     $ 1,437     $ 10     $ 7,043     $ 41  
Other debt securities
    1       14,215       235                   14,215       235  
                                                         
Available for sale:
                                                       
Municipal and other tax-exempt
    23       32,325       1,074                   32,325       1,074  
Residential mortgage-backed securities:
                                                       
U. S. agencies:
                                                       
FNMA
    6       166,825       3,617                   166,825       3,617  
GNMA
    2       45,693       1,533                   45,693       1,533  
Total U.S. agencies
    8       212,518       5,150                   212,518       5,150  
Private issue:
                                                       
Alt-A loans
    20                   176,489       53,569       176,489       53,569  
Jumbo-A loans
    55                   480,782       61,924       480,782       61,924  
Total private issue
    75                   657,271       115,493       657,271       115,493  
Total residential mortgage-backed securities
    83       212,518       5,150       657,271       115,493       869,789       120,643  
Other debt securities
    7       4,965       27       29             4,994       27  
Equity securities and mutual funds
    3       2,681       523       3,606       132       6,287       655  
Total available for sale
    116       252,489       6,774       660,906       115,625       913,395       122,399  
Total
    130     $ 272,310     $ 7,040     $ 662,343     $ 115,635     $ 934,653     $ 122,675  


Temporarily Impaired Securities as of December 31, 2009
                       
(In thousands)
                       
   
Number
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Securities
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
Investment:
                                         
Municipal and other tax exempt
    15     $ 1,490     $ 14     $ 2,991     $ 43     $ 4,481     $ 57  
                                                         
Available for sale:
                                                       
Municipal and other tax-exempt
    27       34,373       265       657       46       35,030       311  
Residential mortgage-backed securities:
                                                       
U. S. agencies:
                                                       
FNMA
    21       497,659       6,864                   497,659       6,864  
FHLMC
    8       212,618       1,568                   212,618       1,568  
GNMA
    16       460,144       6,906                   460,144       6,906  
Other
    4       87,434       5,390                   87,434       5,390  
Total U.S. agencies
    49       1,257,855       20,728                   1,257,855       20,728  
Private issue:
                                                       
Alt-A loans
    21                   195,808       66,298       195,808       66,298  
Jumbo-A loans
    65                   596,554       102,718       596,554       102,718  
Total private issue
    86                   792,362       169,016       792,362       169,016  
Total residential mortgage-backed securities
     135        1,257,855        20,728        792,362        169,016        2,050,217        189,744  
Other debt securities
    5       8,116       26       31       1       8,147       27  
Equity securities and mutual funds
    4       2,790       524                   2,790       524  
Total available for sale
    171       1,303,134       21,543       793,050       169,063       2,096,184       190,606  
Total
    186     $ 1,304,624     $ 21,557     $ 796,041     $ 169,106     $ 2,100,665     $ 190,663  


 
- 60 -

 


Temporarily Impaired Securities as of June 30, 2009
                       
(In thousands)
                       
   
Number
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Securities
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
Investment:
                                         
Municipal and other tax exempt
    62     $ 32,722     $ 280     $ 8,074     $ 172     $ 40,796     $ 452  
                                                         
Available for sale:
                                                       
Municipal and other tax-exempt
    1       643       31                   643       31  
Residential mortgage-backed   securities:
                                                       
U. S. agencies:
                                                       
FNMA
    13       156,381       595       107,048       128       263,429       723  
FHLMC
    12       325,286       2,036                   325,286       2,036  
GNMA
    4       127,661       1,089                   127,661       1,089  
Other
    4       64,272       1,030                   64,272       1,030  
U. S. agencies
    33       673,600       4,750       107,048       128       780,648       4,878  
Private issue:
                                                       
Alt-A loans
    28                   254,424       102,613       254,424       102,613  
Jumbo-A loans
    87       97,380       8,989       822,509       161,334       919,889       170,323  
Total private issue
    115       97,380       8,989       1,076,933       263,947       1,174,313       272,936  
Total residential mortgage-backed securities
    148       770,980       13,739       1,183,981       264,075       1,954,961       277,814  
Perpetual preferred stock
    8       7,968       988       8,350       1,919       16,318       2,907  
Equity securities and mutual funds
    8       2,681       524       38             2,719       524  
        Total available for sale
    165       782,272       15,282       1,192,369       265,994       1,974,641       281,276  
Total
    227     $ 814,994     $ 15,562     $ 1,200,443     $ 266,166     $ 2,015,437     $ 281,728  
 
On a quarterly basis, the Company performs separate evaluations of impaired debt and equity securities to determine if the unrealized losses are temporary.
 
 
For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities.  This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management.  Based on this evaluation as of June 30, 2010, we do not intend to sell any impaired available for sale securities before fair value recovers to our current amortized cost and it is more-likely-than-not that we will not be required to sell impaired securities before fair value recovers.
 
 
For all impaired debt securities for which there was no intent or expected requirement to sell, the evaluation considers all available evidence to assess whether it is more likely than not that all amounts due would not be collected according to the security’s contractual terms.
 
Impairment of debt securities rated investment grade by all nationally-recognized rating agencies are considered temporary unless specific contrary information is identified.  None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at June 30, 2010.


 
- 61 -

 

As of June 30, 2010, the composition of the Company’s securities portfolio by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):

   
 
U.S. Govt / GSE (1)
   
 
AAA - AA
   
 
A - BBB
   
 
Below Investment Grade
   
 
Not Rated
   
 
Total
 
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
Held-to-Maturity:
                                                                       
Municipal and other tax-exempt
  $     $     $ 64,799     $ 66,630     $ 42,207     $ 43,258     $     $     $ 114,696     $ 117,413     $ 221,702     $ 227,301  
Other debt securities
                61,800       61,800       1,350       1,350                   68,425       73,435       131,575       136,585  
Total
  $     $     $ 126,599     $ 128,430     $ 43,557     $ 44,608     $     $     $ 183,121     $ 190,848     $ 353,277     $ 363,886  
                                                                                                 
Available for Sale:
                                                                                               
Municipal and other tax-exempt
  $     $     $ 46,859     $ 47,785     $ 6,611     $ 6,677     $ 10,339     $ 9,601     $ 2,244     $ 2,376     $ 66,053     $ 66,439  
Residential mortgage-backed securities:
                                                                                               
U. S. agencies:
                                                                                               
FNMA
    4,148,758       4,319,324                                                       4,148,758       4,319,324  
FHLMC
    2,680,437       2,776,620                                                       2,680,437       2,776,620  
GNMA
    972,348       1,011,522                                                       972,348       1,011,522  
Other
    107,564       116,253                                                       107,564       116,253  
Total U.S. agencies
    7,909,107       8,223,719                                                       7,909,107       8,223,719  
Private issue:
                                                                                               
Alt-A loans
                12,996       11,948       11,831       11,529       205,231       153,012                   230,058       176,489  
Jumbo-A loans
                89,683       90,927       140,972       133,250       388,760       334,850                   619,415       559,027  
Total private issue
                102,679       102,875       152,803       144,779       593,991       487,862                   849,473       735,516  
Total residential  mortgage-backed securities
    7,909,107       8,223,719       102,679       102,875       152,803       144,779       593,991       487,862                       8,758,580       8,959,235  
Other debt securities
                10,292       10,267                   2,550       2,670       129       127       12,971       13,064  
Federal Reserve Bank stock
    32,844       32,844                                                       32,844       32,844  
Federal Home Loan Bank stock
    88,048       88,048                                                       88,048       88,048  
Perpetual preferred stock
                            19,224       19,881                               19,224       19,881  
Equity securities and mutual funds
                                                    33,561       47,209       33,561       47,209  
Total
  $ 8,029,999     $ 8,344,611     $ 159,830     $ 160,927     $ 178,638     $ 171,337     $ 606,880     $ 500,133     $ 35,934     $ 49,712     $ 9,011,281     $ 9,226,720  
(1)  
U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises.

At June 30, 2010, approximately $594 million of the portfolio of privately issued residential mortgage-backed securities (based on amortized cost after impairment charges) was rated below investment grade by at least one of the nationally-recognized rating agencies.  The aggregate unrealized loss on these securities totaled $106 million.  Ratings by the nationally recognized rating agencies are subjective in nature and accordingly ratings can vary significantly amongst the agencies.  Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default.  As such, the impairment of securities rated below investment grade by at least one of the nationally-recognized rating agencies was evaluated to determine if we expect not to recover the entire amortized cost basis of the security.  This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and estimated liquidation costs at foreclosure.  The primary assumptions used in this evaluation were:

 
- 62 -

 


·  
Unemployment rates – increasing to 10% over the next 12 months, dropping to 8% for the following 12 months, and holding at 8% thereafter.
·  
Housing price depreciation – starting with current depreciated housing prices based on information derived from the Federal Housing Finance Agency data, decreasing by an additional 5% over the next twelve months and holding at that level thereafter.
·  
Estimated Liquidation Costs – held constant at 27% of the then-current depreciated housing price at estimated foreclosure date.
·  
Discount rates – estimated cash flows were discounted at rates that range from 5.50% to 6.14% based on our current expected yields.

We also consider the adjusted loan-to-value ratio and credit enhancement coverage ratio as part of the assessment of the cash flows available to recover the amortized cost of the debt securities.  Each factor is given equal weight in the evaluation.

Adjusted loan-to-value ratio is an estimate of the collateral value available to support the realizable value of the security.  The Company calculates the adjusted loan-to-value ratio for each security using loan-level data.  The adjusted loan-to-value ratio is the original loan-to-value ratio adjusted for market-specific home price depreciation and the credit enhancement on the specific tranche of the security owned by the Company.  The home price depreciation is derived from the Federal Housing Finance Agency (“FHFA”).  FHFA provides historical information on home price depreciation at both the Metropolitan Statistical Area (“MSA”) and state level.  This information is matched to each loan to calculate the home price depreciation.  Data is accumulated from the loan level to determine the adjusted loan-to-value ratio for the security as a whole.  The Company believes that an adjusted loan-to-value ratio above 85% provides evidence that the collateral value may not provide sufficient cash flows to support our carrying value.  The 85% guideline provides for further home price depreciation in future periods beyond our assumptions of current loss trends for residential real estate loans and is consistent with current underwriting standards used by the Company to originate new residential mortgage loans.

A distribution of the amortized cost (after recognition of the other-than-temporary impairment) and fair value by adjusted loan to value ratio is as follows (in thousands):

                     
Credit Losses Recognized
 
                     
For the three months ended
June 30, 2010
   
Life-to-date
 
 
Adjusted LTV Ratio
 
Number of Securities
   
Amortized Cost
   
Fair Value
   
Number of
Securities
   
Amount
   
Number of Securities
   
Amount
 
< 70 %
    4     $ 24,174     $ 24,049           $           $  
70 < 75
    2       51,723       46,436                          
75 < 80
    2       46,616       38,648       1       271       1       1,269  
80 < 85
    10       241,942       198,517       4       805       7       7,251  
>= 85
    10       229,536       180,212       5       1,570       9       23,493  
Total
    28     $ 593,991     $ 487,862       10     $ 2,646       17     $ 32,013  

Credit enhancement coverage ratio is an estimate of credit enhancement available to absorb current projected losses within the pool of loans that support the security.  The Company acquires the benefit of credit enhancement by investing in super-senior tranches for many of our residential mortgage-backed securities.  Subordinated tranches held by other investors are specifically designed to absorb losses before the super-senior tranches which effectively doubled the typical credit support for these types of bonds.  Current projected losses consider depreciation of home prices based on FHFA data, estimated costs and additional losses to liquidate collateral and delinquency status of the individual loans underlying the security.  Management believes that a credit enhancement coverage ratio below 1.50 provides evidence that current credit enhancement may not provide sufficient cash flows of the individual loans to support our carrying value at the security level.  The credit enhancement coverage ratio guideline of 1.50 times is based on standard underwriting criteria which consider loans with coverage ratios of 1.20 to 1.25 times to be well-secured.

Additional evidence considered by the Company is the current loan-to-value ratio and the FICO score of individual borrowers whose loans are still performing within the collateral pool as forward-looking indicators of possible future losses that could affect our evaluation.


 
- 63 -

 

Based upon projected declines in expected cash flows from certain private-label residential mortgage-backed securities, the Company recognized $2.6 million of credit loss impairment in earnings during the second quarter of 2010.  Additional impairment based on the difference between the total unrealized losses and the estimated credit losses on these securities was charged against other comprehensive income, net of deferred taxes.

The following represents the composition of net impairment losses recognized in earnings (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
OTTI related to perpetual preferred stocks recognized in earnings
  $       $       $     $ (8,008 )
OTTI on debt securities due to change in intent to sell
            (1,263 )             (1,263 )
OTTI on debt securities not intended for sale
    (10,959 )           (20,667 )     (46,360 )
Less:  Portion of OTTI recognized in other comprehensive income
    (8,313 )      279       (13,796 )     (39,087 )
OTTI recognized in earnings related to credit losses on debt securities not intended for sale
    (2,646 )     (279 )     (6,871 )     (7,273 )
Total OTTI recognized in earnings
  $ (2,646 )   $ (1,542 )   $ (6,871 )   $ (16,544 )


The following is a tabular roll forward of the amount of credit-related OTTI recognized on available-for-sale debt securities in earnings (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Balance of credit-related OTTI recognized on available for sale debt, beginning of period
  $ 29,367     $ 6,994     $ 25,142     $  
Additions for credit-related OTTI not previously recognized
     791               1,789       6,994  
Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost
     1,855        279       5,082       279  
Balance of credit-related OTTI recognized on available for sale debt securities, end of period
  $  32,013     $  7,273     $ 32,013     $ 7,273  


 
 
Mortgage Trading Securities
 
Mortgage trading securities are residential mortgage-backed securities issued by U.S. government agencies that have been designated as an economic hedge of the mortgage servicing rights and are separately identified on the balance sheet.  The Company has elected to carry these securities at fair value with changes in fair value being recognized in earnings as they occur.  Mortgage trading securities were carried at their fair value of $535 million at June 30, 2010 with a net unrealized gain of $14 million.  Mortgage trading securities were carried at their fair value of $286 million at December 31, 2009, with a net unrealized loss of $2.1 million and fair value of $223 million at June 30, 2009 with a net unrealized gain of $1.4 million.  The Company recognized net gains of $14.6 million and $15.1 million on mortgage trading securities in the second quarter and first half of 2010, respectively.  The Company recognized net losses of $10.2 million and $12.3 million on mortgage trading securities in the second quarter and first half of 2009, respectively.


 
- 64 -

 

(3) Derivatives
 
The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2010 (in thousands):
 
   
Gross Basis
   
Net Basis2
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
   
Notional¹
   
Fair Value
   
Notional¹
   
Fair Value
   
Fair Value
   
Fair Value
 
Customer Risk Management Programs:
                                   
Interest rate contracts
  $ 9,128,247     $ 199,965     $ 8,975,646     $ 198,807     $ 153,044     $ 151,858  
Energy contracts
    2,667,481       327,577       3,007,643       332,804       119,537       124,764  
Agricultural contracts
    236,113       6,882       242,192       6,607       936       657  
Foreign exchange contracts
    54,241       54,241       54,241       54,241       54,241       54,241  
CD options
    107,740       6,854       107,740       6,854       6,854       6,854  
Total customer derivatives before cash collateral
    12,193,822       595,519       12,387,462       599,313       334,612       338,374  
Less: cash collateral
                            (7,873 )     (38,619 )
Total customer derivatives
    12,193,822       595,519       12,387,462       599,313       326,739       299,755  
                                                 
Interest Rate Risk Management Programs
    168,000       7,837       28,357       96       7,837       96  
Total Derivative Contracts
  $ 12,361,822     $ 603,356     $ 12,415,819     $ 599,409     $ 334,576     $ 299,851  
 
¹
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
 
2
Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.

When bilateral netting agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by counterparty basis.

Derivative contracts may also require the Company to provide or receive cash margin as collateral for derivative assets and liabilities.  Derivative assets and liabilities are reported net of cash margin when certain conditions are met.  As of June 30, 2010, a decrease in credit rating from A1 to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $45 million.

The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2009 (in thousands):
 
   
Gross Basis
   
Net Basis2
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
   
Notional¹
   
Fair Value
   
Notional¹
   
Fair Value
   
Fair Value
   
Fair Value
 
Customer Risk Management Programs:
                                   
Interest rate contracts3
  $ 7,392,393     $ 156,261     $ 7,294,028     $ 161,225     $ 110,449     $ 115,413  
Energy contracts
    3,588,767       454,978       3,719,796       450,614       174,319       176,983  
Agricultural contracts
    23,196       1,004       31,715       875       1,004       875  
Foreign exchange contracts
    63,942       64,182       64,182       64,182       64,182       64,182  
CD options
    66,248       5,493       66,248       5,493       5,493       5,493  
Total customer derivatives before cash collateral
    11,134,546       681,918       11,175,969       682,389       355,447       362,946  
Less: cash collateral
                            (13,229 )     (54,586 )
Total customer derivatives
    11,134,546       681,918       11,175,969       682,389       342,218       308,360  
                                                 
Interest Rate Risk Management Programs
    40,000       1,564                   1,564        
Total Derivative Contracts
  $ 11,174,546     $ 683,482     $ 11,175,969     $ 682,389     $ 343,782     $ 308,360  
 
¹
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
2  
Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.
3  
Gross notional and gross fair value amounts have been revised to conform with current period presentation.  The net fair values of assets and liabilities were not affected.

 
- 65 -

 

 
The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2009 (in thousands):
 
   
Gross Basis
   
Net Basis2
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
   
Notional¹
   
Fair Value
   
Notional¹
   
Fair Value
   
Fair Value
   
Fair Value
 
Customer Risk Management Programs:
                                   
Interest rate contracts
  $ 10,397,136     $ 195,438     $ 10,332,931     $ 200,285     $ 131,191     $ 136,034  
Energy contracts
    4,724,435       800,902       4,930,614       797,421       290,974       294,081  
Agricultural contracts
    20,837       960       14,189       849       960       849  
Foreign exchange contracts
    48,237       48,237       48,237       48,237       48,237       48,237  
CD options
    51,380       4,494       51,380       4,494       4,494       4,494  
Total customer derivatives before cash collateral
    15,242,025       1,050,031       15,377,351       1,051,286       475,856       483,695  
Less: cash collateral
                            (17,147 )     (38,232 )
Total customer derivatives
    15,242,025       1,050,031       15,377,351       1,051,286       458,709       445,463  
                                                 
Interest Rate Risk Management Programs
    435,000       4,262                   4,262        
Total Derivative Contracts
  $ 15,677,025     $ 1,054,293     $ 15,377,351     $ 1,051,286     $ 462,971     $ 445,463  
 
¹
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
 
2
Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.

The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):

   
Three Months ended
June 30, 2010
   
Three Months ended
June 30, 2009
 
   
Brokerage
and Trading Revenue
   
Gain (Loss)
on Derivatives, Net
   
Brokerage
and Trading
Revenue
   
Gain (Loss)
on Derivatives,
Net
 
Customer Risk Management Programs:
                       
Interest rate contracts
  $ (800 )   $     $ 741     $  
Energy contracts
    2,561             1,485        
Cattle contracts
    232             131        
Foreign exchange contracts
    159             93        
CD options
                       
Total Customer Derivatives
    2,152             2,450        
                                 
Interest Rate Risk Management Programs
          7,552             (4,578 )
Total Derivative Contracts
  $ 2,152     $ 7,552     $ 2,450     $ (4,578 )

 
   
Six Months ended
June 30, 2010
   
Six Months ended
June 30, 2009
 
   
Brokerage
and Trading Revenue
   
Gain (Loss)
on Derivatives, Net
   
Brokerage
and Trading
Revenue
   
Gain (Loss)
on Derivatives,
Net
 
Customer Risk Management Programs:
                       
Interest rate contracts
  $ 763     $     $ 1,680     $  
Energy contracts
    4,025             1,314        
Cattle contracts
    449             334        
Foreign exchange contracts
    333             174        
CD options
                       
Total Customer Derivatives
    5,570             3,502        
                                 
Interest Rate Risk Management Programs
          6,676             (8,604 )
Total Derivative Contracts
  $ 5,570     $ 6,676     $ 3,502     $ (8,604 )

 
Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates, or to take positions in derivative contracts.  Derivative contracts are executed between the customers and BOK Financial.  Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize its risk of changes in commodity prices, interest rates or foreign exchange rates.  The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue.
 

 

 
- 66 -

 

Interest Rate Risk Management Programs
 
BOK Financial uses interest rate swaps in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights.  Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed rate liabilities to floating rate based on LIBOR.  Net interest revenue was increased by $1.0 million and $4.6 million for the three months ended June 30, 2010 and 2009, respectively, from the settlement of amounts receivable or payable on interest rate swaps.  As of June 30, 2010, BOK Financial had interest rate swaps with a notional value of $163 million used as part of the economic hedge of the change in the fair value of the mortgage servicing rights.

BOK Financial also enters into mortgage loan commitments that are considered derivative instruments.  Forward sales contracts are used to hedge these mortgage loan commitments as well as mortgage loans held for sale.  Mortgage loan commitments are carried at fair value based upon quoted prices, excluding the value of loan servicing rights or other ancillary values.  Changes in fair value of the mortgage loan commitments and forward sales contracts are reported in other operating revenue – mortgage banking revenue.

The notional and the fair value included in residential mortgage loans held for sale on the balance sheet related to derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward contract sales were (in thousands):

   
June 30, 2010
   
December 31, 2009
   
June 30, 2009
 
   
Notional
   
Fair Value
   
Notional
   
Fair Value
   
Notional
   
Fair Value
 
                                     
Mortgage loan commitments
  $ 189,029     $ 5,538     $ 117,716     $ 496     $ 239,772     $ 1,847  
Forward sales contracts
    407,457       (7,457 )     333,218       3,626       561,639       5,085  
            $ (1,919 )           $ 4,122             $ 6,932  

The related gain (loss) included in mortgage banking revenue in the Consolidated Statement of Earnings (Unaudited) related to the changes in the fair value of derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward contract sales were (in thousands):

   
Mortgage Banking Revenue
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Mortgage loan commitments
  $ 3,071     $ (5,425 )   $ 5,042     $ (322 )
Forward sales contracts
    (7,836 )     9,589       (11,083 )     5,302  
    $ (4,765 )   $ 4,164     $ (6,041 )   $ 4,980  


(4) Impaired Loans

Impaired Loans

Investments in loans considered to be impaired were as follows (in thousands):

   
June 30,
2010
   
December 31,
2009
   
June 30,
2009
 
Investment in impaired loans (all of which were on a nonaccrual basis)
  $ 292,679     $ 316,666     $ 327,888  
Loans with specific reserves for loss
    202,861       204,076       228,928  
Specific reserve balance
    19,578       36,168       34,278  
No specific related reserve for loss
    89,818       112,590       98,960  
Average recorded investment in impaired loans
    319,655       327,935       272,840  

Approximately $18 million of losses on impaired loans with no related specific reserves at June 30, 2010 were charged off against the allowance for loan losses in the second quarter of 2010.  Interest income recognized on impaired loans was not significant.

 
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(5) Reserve for Credit Losses

The activity in the reserve for loan losses is summarized as follows (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Beginning balance
  $ 299,717     $ 251,002     $ 292,095     $ 233,236  
Provision for loan losses
    35,326       47,244       77,426       96,881  
Loans charged off
    (38,168 )     (37,409 )     (78,496 )     (71,944 )
Recoveries
    2,614       2,472       8,464       5,136  
Ending balance
  $ 299,489     $ 263,309     $ 299,489     $ 263,309  


The activity in the reserve for off-balance sheet credit losses is summarized as follows (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Beginning balance
  $ 14,388     $ 10,569     $ 14,388     $ 15,166  
Provision for off-balance sheet credit losses
    714       (124 )     714       (4,721 )
Ending balance
  $ 15,102     $ 10,445     $ 15,102     $ 10,445  
                                 
Provision for credit losses
  $ 36,040     $ 47,120     $ 78,140     $ 92,160  



 
- 68 -

 

(6) Mortgage Banking Activities

BOK Financial transfers financial assets as part of its mortgage banking activities.  Transfers are recorded as sales for financial reporting purposes when the criteria for surrender of control are met.  BOK Financial may retain the right to service the assets and may incur a recourse obligation.  The Company may also retain a residual interest in excess cash flows generated by the assets.  All assets obtained, including cash, servicing rights and residual interests, and all liabilities incurred, including recourse obligations, are initially recognized at fair value, all assets transferred are derecognized and any gain or loss on the sale is recognized in earnings.  Subsequently, servicing rights and residual interests are carried at fair value with changes in fair value recognized in earnings as they occur.  A separate reserve is maintained as part of other liabilities for the Company’s credit risk on loans transferred subject to a recourse obligation.

Residential mortgage loans held for sale totaled $228 million and $326 million, and outstanding mortgage loan commitments totaled $266 million and $292 million at June 30, 2010 and 2009, respectively.  Residential mortgage loans held for sale totaled $218 million and outstanding mortgage loan commitments totaled $145 million at December 31, 2009.  Mortgage loan commitments are generally outstanding for 60 to 90 days and are subject to both credit and interest rate risk.  Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets.  Exposure to interest rate fluctuations is partially managed through forward sales of mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.  As of June 30, 2010, the unrealized loss recognized on forward sales contracts used to manage the mortgage pipeline interest rate risk was approximately $7.5 million.  Gains on mortgage loans sold, including capitalized mortgage servicing rights, totaled $9.4 million and $21.2 million in the first half of 2010 and 2009, respectively.
 
Mortgage servicing rights may be purchased or may be recognized when mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold.  Originated mortgage servicing rights are initially recognized at fair value.  Purchased servicing rights are initially recognized at purchase price.  All mortgage servicing rights are subsequently carried at fair value.  Changes in the fair value are recognized in earnings as they occur.

During the first quarter of 2010, the Company purchased the rights to service approximately 34 thousand residential mortgage loans with an outstanding principal balance of $4.2 billion.  The loans to be serviced are primarily concentrated in New Mexico and predominantly held by Fannie Mae, Ginnie Mae and Freddie Mac.  The cash purchase price was $32 million.  The acquisition date fair value of the servicing rights was approximately $43.7 million based upon independent valuation analyses which were further supported by assumptions and models the Company regularly uses to value its existing portfolio of servicing rights.  The $11.8 million difference between the purchase price and acquisition date fair value was directly attributable to the seller’s distressed financial condition.

BOK Financial owned the rights to service 99,788 mortgage loans with outstanding principal balances of $11.9 billion, including $806 million serviced for affiliates at June 30, 2010, and owned rights to service 61,595 mortgage loans with outstanding principal balances of $6.9 billion, including $885 million serviced for affiliates at June 30, 2009.  The weighted average interest rate and remaining term was 5.64% and 296 months, respectively, at June 30, 2010, and 5.80% and 287 months, respectively, at June 30, 2009.

For the three months and six months ended June 30, 2010, mortgage banking revenue includes servicing fee income and late charges on loans serviced for others of $9.6 million and $17.9 million, respectively.  For the three months and six months ended June 30, 2009, mortgage banking revenue includes servicing fee income and late charges on loans serviced for others of $4.8 million and $9.4 million, respectively.

Activity in capitalized mortgage servicing rights during the three months ending June 30, 2010 is as follows (in thousands):
   
Capitalized Mortgage Servicing Rights
 
   
Purchased
   
Originated
   
Total
 
Balance at March 31, 2010
  $ 51,919     $ 67,147     $ 119,066  
Additions, net
          5,161       5,161  
Change in fair value due to loan runoff
    (1,313 )     (4,514 )     (5,827 )
Change in fair value due to market changes
    (13,160 )     (6,298 )     (19,458 )
Balance at June 30, 2010
  $ 37,446     $ 61,496     $ 98,942  


 
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Activity in capitalized mortgage servicing rights during the six months ending June 30, 2010 is as follows (in thousands):
   
Capitalized Mortgage Servicing Rights
 
   
Purchased
   
Originated
   
Total
 
Balance at December 31, 2009
  $ 7,828     $ 65,996     $ 73,824  
Additions, net
    31,892       10,362       42,254  
Change in fair value due to loan runoff
    (2,641 )     (8,969 )     (11,610 )
Change in fair value due to market changes
    367 (1)     (5,893 )     (5,526 )
Balance at June 30, 2010
  $ 37,446     $ 61,496     $ 98,942  
(1)  Includes initial pre-tax gain of $11.8 million on the purchase of mortgage servicing rights.

Activity in capitalized mortgage servicing rights during the three months ending June 30, 2009 is as follows (in thousands):

   
Capitalized Mortgage Servicing Rights
 
   
Purchased
   
Originated
   
Total
 
 
Balance at March 31, 2009
  $   6,786     $  43,460     $  50,246  
Additions, net
          14,778       14,778  
Change in fair value due to loan runoff
    (688 )     (4,788 )     (5,476 )
Change in fair value due to market changes
    1,871       5,994       7,865  
Balance at June 30, 2009
  $ 7,969     $ 59,444     $ 67,413  

Activity in capitalized mortgage servicing rights during the six months ending June 30, 2009 is as follows (in thousands):

   
Capitalized Mortgage Servicing Rights
 
   
Purchased
   
Originated
   
Total
 
 
Balance at December 31, 2008
  $   6,353     $  36,399     $  42,752  
Additions, net
          25,268       25,268  
Change in fair value due to loan runoff
    (1,464 )     (8,963 )     (10,427 )
Change in fair value due to market changes
    3,080       6,740       9,820  
Balance at June 30, 2009
  $ 7,969     $ 59,444     $ 67,413  

Changes in the fair value of mortgage servicing rights are included in Other Operating Expense in the Consolidated Statements of Earnings (Unaudited).  Changes in fair value due to loan runoff are included in mortgage banking costs.  Changes in fair value due to market changes are reported separately.  Changes in fair value due to market changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination.  Fair value is determined by discounting the projected net cash flows. Significant assumptions considered significant unobservable inputs used to determine fair value are:
   
June 30, 2010
   
December 31, 2009
   
June 30, 2009
 
Discount rate – risk-free rate plus a market premium
    10.38 %     11.2 %     10.51 %
Prepayment rate – based upon loan interest rate, original term and loan type
    8.3% - 34.5 %     8.1% - 26.9 %     5.2% - 26.2 %
Loan servicing costs – annually per loan based upon loan type
  $ 35 - $60     $ 43 - $66     $ 43 - $73  
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
    1.34 %     2.98 %     2.96 %

 
The Company is exposed to interest rate risk as mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of mortgage-backed securities and forward sales contracts. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors.  The prepayment model is updated daily for changes in market conditions and adjusted to better correlate with actual

 
- 70 -

 

performance of BOK Financial’s servicing portfolio.  At least annually, we request estimates of fair value from outside sources to corroborate the results of the valuation model.  There have been no changes in the techniques used to value mortgage servicing rights.

Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 2010 follows (in thousands):

   
< 5.50%
      5.50% - 6.49 %     6.50% - 7.49 %  
> 7.49%
   
Total
                                 
Fair value
  $ 52,241     $ 34,887     $ 9,827     $ 1,987     $ 98,942  
 
Outstanding principal of loans serviced (1)
  $  4,942,800     $  4,335,500     $  1,460,000     $ 319,085     $  11,057,385  
(1) Excludes outstanding principal of $806 million for loans serviced for affiliates.
 

The interest rate sensitivity of our mortgage servicing rights and securities and derivative contracts held as an economic hedge is modeled over a range of +/- 50 basis points. At June 30, 2010, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedging by $1.8 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedging by $4.7 million.  Our model of changes in the value of our servicing rights due to changes in interest rates assumes stable relationships between mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.


(7) Employee Benefits

BOK Financial has sponsored a defined benefit Pension Plan for all employees who satisfied certain age and service requirements.  Pension Plan benefits were curtailed as of April 1, 2006.  Periodic pension expense was $955 thousand and $737 thousand for the three months ended June 30, 2010 and 2009, respectively and $1.6 million and $1.2 million during the six months ended June 30, 2010 and 2009, respectively.  The Company made no Pension Plan contributions during the six months ended June 30, 2010 and 2009.

Management has been advised that the maximum allowable contribution for 2010 is $22.6 million.  The minimum required contribution for 2010 is $245 thousand.


(8)  Commitments and Contingent Liabilities

BOSC, Inc. has been joined as a defendant in a putative class action brought on behalf of unit holders of SemGroup Energy Partners, LP in the United States District Court for the Northern District of Oklahoma.  The lawsuit is brought pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 against all of the underwriters of issuances of partnership units in the Initial Public Offering in July 2007 and in a Secondary Offering in January 2008.  BOSC underwrote $6.25 million of units in the Initial Public Offering.  BOSC was not an underwriter in the Secondary Offering.  Counsel for BOSC believes BOSC has valid defenses to the claims asserted in the litigation and management does not anticipate any material loss.

As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan.  A contingent liability was recognized for the Company’s share of Visa’s covered litigation liabilities.  This contingent liability totaled $2.2 million at June 30, 2010.  During 2008, Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering and from available cash.  BOK Financial recognized a $2.2 million receivable for its proportionate share of this escrow account.

BOK Financial received 410,562 Visa Class B shares as part of Visa’s initial public offering in the first quarter of 2008.  A partial redemption of Class B shares was completed and the Company received $6.8 million in cash in exchange for 158,725 Class B shares.  The remaining 251,837 Class B shares are convertible into Visa Class A

 
- 71 -

 

shares at the later of three years after the date of Visa’s initial public offering or the final settlement of all covered litigation.  The current exchange rate is approximately 0.5824 Class A shares for each Class B share.  However, the Company’s Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs.  Therefore, under currently issued accounting guidance, no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares.

At June 30, 2010, Cavanal Hill Funds’ assets included $730 million of U.S. Treasury, $867 million of cash management and $473 million of tax-free money market funds.  Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities.  The net asset value of units in these funds was $1.00 at June 30, 2010.  An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries.  BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00.  No assets were purchased from the funds in 2010 or 2009.

In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints.  Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not be material in the aggregate.

(9) Shareholders’ Equity

On July 27, 2010, the Board of Directors of BOK Financial Corporation approved a $0.25 per share quarterly common stock dividend.  The quarterly dividend will be payable on August 27, 2010 to shareholders of record on August 13, 2010.

Dividends declared during the three and six month periods ended June 30, 2010 were $0.25 per share and $0.49 per share, respectively.    Dividends declared during the three and six months ended June 30, 2009 were $0.24 per share and $0.465 per share, respectively.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) (“AOCI”) includes unrealized gains and losses on available for sale securities and accumulated gains or losses on effective cash flow hedges, including hedges of anticipated transactions.  Gains and losses in AOCI are net of deferred income taxes.  Accumulated losses on the rate lock hedge of the 2005 subordinated debenture issuance will be reclassified into income over the ten-year life of the debt.  Unrealized losses on employee benefit plans will be reclassified into income as pension plan costs are recognized over the remaining service period of plan participants.

   
Unrealized
   
Other
   
Accumulated
   
Unrealized
       
   
Gain (Loss)
   
Than
   
(Loss) on
   
(Loss)
       
   
On Available
   
Temporary
   
Effective
   
On
       
   
For Sale
   
Impairment
   
Cash Flow
   
Employee
       
   
Securities
   
Losses
   
Hedges
   
Benefit Plans
   
Total
 
Balance at December 31, 2008
  $ (204,648 )   $     $ (1,199 )   $ (17,039 )   $ (222,886 )
Unrealized gains on securities
    224,634       15,177                   239,811  
Other-than-temporary impairment losses on securities
          (39,087 )                 (39,087 )
Tax benefit (expense) on unrealized gains (losses)
    (78,027 )     8,295                   (69,732 )
Reclassification adjustment for (gains) losses realized and included in net income
    (10,152 )           117             (10,035 )
Reclassification adjustment for tax expense (benefit) on realized gains (losses)
    3,526             (45 )           3,481  
Balance at June 30, 2009
  $ (64,667 )   $ (15,615 )   $ (1,127 )   $ (17,039 )   $ (98,448 )
Balance at December 31, 2009
  $ 59,772     $ (53,000 )   $ (1,039 )   $ (16,473 )   $ (10,740 )
Unrealized gains on securities
    216,549       12,006                   228,555  
Other-than-temporary impairment losses on securities
          (13,796 )                 (13,796 )
Unrealized gains on employee benefit plans
                      373       373  
Tax benefit (expense) on unrealized gains (losses)
    (83,845 )     945             (145 )     (83,045 )
Reclassification adjustment for (gains) losses realized and included in net income
    (12,545 )           136             (12,409 )
Reclassification adjustment for tax expense (benefit)on realized gains (losses)
    4,886             (53 )           4,833  
Balance at June 30, 2010
  $ 184,817     $ (53,845 )   $ (956 )   $ (16,245 )   $ 113,771  


 
- 72 -

 

(10)  Earnings Per Share

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
Net income
  $ 63,522     $ 52,115     $ 123,655     $ 107,147  
Earnings allocated to participating securities
    (434 )     (234 )     (767 )     (414 )
Numerator for basic earnings per share – income available to common shareholders
    63,088       51,881       122,888        106,733  
Effect of reallocating undistributed earnings of participating securities
    1             2        
Numerator for diluted earnings per share – income available to common shareholders
  $ 63,089     $ 51,881     $ 122,890     $  106,733  
Denominator:
                               
Weighted average shares outstanding
    68,069,864       67,647,860       68,018,225       67,592,257  
Less:  Participating securities included in weighted average shares outstanding
    (464,057 )     (303,283 )     (418,876 )     (261,667 )
Denominator for basic earnings per common share
    67,605,807       67,344,577       67,599,349       67,330,590  
Dilutive effect of employee stock compensation plans (1)
    274,780       103,452       236,257       87,284  
Denominator for diluted earnings per common share
    67,880,587       67,448,029       67,835,606       67,417,874  
Basic earnings per share
  $ 0.93     $ 0.77     $ 1.82     $ 1.59  
Diluted earnings per share
  $ 0.93     $ 0.77     $ 1.81     $ 1.58  
(1)Excludes employee stock options with exercise prices greater than current market price.
    601,361       2,497,178       1,018,503       3,059,192  


(11)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2010 is as follows (in thousands):

 
 
Commercial
   
Consumer
   
Wealth
Management
   
Tax-Equivalent Adjustment
   
Funds Management and Other
   
BOK
Financial
Consolidated
 
NIR (expense) from external sources
  $ 85,116     $ 21,587     $ 8,324     $ 2,327     $ 64,759     $ 182,113  
NIR (expense) from internal sources
    (12,712 )     11,452       2,391             (1,131 )      
                                                 
Total net interest revenue
    72,404       33,039       10,715       2,327       63,628       182,113  
                                                 
Other operating revenue
    33,642       50,466       42,020             3,585       129,713  
Operating expense
    50,973       61,874       43,829             19,134       175,810  
Provision for credit losses
    22,477       9,943       3,135             485       36,040  
Decrease in fair value of mortgage
   service rights
          (19,458 )                       (19,458 )
Gain on financial instruments, net
          22,431       15             5,280       27,726  
Gain (loss) on repossessed assets, net
    (10,742 )     98                         (10,644 )
Income before taxes
    21,854       14,759       5,786       2,327       52,874       97,600  
Federal and state income tax
    8,501       5,741       2,251             15,549       32,042  
Net income
    13,353       9,018       3,535       2,327       37,325       65,558  
Net income attributable to non-controlling interest
                            2,036       2,036  
Net income attributable to BOK Financial Corporation
  $ 13,353     $ 9,018     $ 3,535     $ 2,327     $ 35,289     $ 63,522  
                                                 
Average assets
  $ 8,990,120     $ 6,198,808     $ 3,355,079           $ 4,900,800     $ 23,444,807  


 
- 73 -

 

Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2010 is as follows (in thousands):
 
 
Commercial
   
Consumer
   
Wealth
Management
   
Tax-Equivalent Adjustment
   
Funds Management and Other
   
BOK
Financial
Consolidated
 
NIR (expense) from external sources
  $ 170,014     $ 41,171     $ 16,928     $ 4,743     $ 131,831     $ 364,687  
NIR (expense) from internal sources
    (25,173 )     23,312       5,412             (3,551 )      
                                                 
Total net interest revenue
    144,841       64,483       22,340       4,743       128,280       364,687  
                                                 
Other operating revenue
    63,461       93,709       79,340             7,128       243,638  
Operating expense
    101,131       118,203       84,901             44,240       348,475  
Provision for credit losses
    50,856       13,276       5,900             8,108       78,140  
Decrease in fair value of mortgage
   service rights
          (5,526 )                       (5,526 )
Gain on financial instruments, net
          22,220       16             5,448       27,684  
Gain (loss) on repossessed assets, net
    (15,764 )     121                         (15,643 )
Income before taxes
    40,551       43,528       10,895       4,743       88,508       188,225  
Federal and state income tax
    15,774       16,932       4,238             25,381       62,325  
Net income
    24,777       26,596       6,657       4,743       63,127       125,900  
Net income attributable to non-controlling interest
                            2,245       2,245  
Net income attributable to BOK Financial Corporation
  $ 24,777     $ 26,596     $ 6,657     $ 4,743     $ 60,882     $ 123,655  
                                                 
Average assets
  $ 9,086,117     $ 6,179,261     $ 3,321,811           $ 4,990,848     $ 23,578,037  

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2009 is as follows (in thousands):
   
Commercial
   
Consumer
   
Wealth
Management
   
Tax-Equivalent Adjustment
   
Funds Management and Other
   
BOK
Financial
Consolidated
 
NIR (expense) from external sources
  $ 87,016     $ 12,877     $ 5,690     $ 1,792     $ 68,205     $ 175,580  
NIR (expense) from internal sources
    (13,251 )     21,146       5,723             (13,618 )      
                                                 
Total net interest revenue
    73,765       34,023       11, 413       1,792       54,587       175,580  
                                                 
Other operating revenue
    33,837       49,632       38,556             2,048       124,073  
Operating expense
    56,286       64,759       42,546             20,083       183,674  
Provision for credit losses
    24,655       5,653       4,629             12,183       47,120  
Increase in fair value of mortgage
   service rights
    ­       7,865       ­                   7,865  
Gain (loss) on financial instruments,
   net
          (10,199 )                 14,091       3,892  
Gain (loss) on repossessed assets, net
    59       (20 )                       39  
Income before taxes
    26,720       10,889       2,794       1,792       38,460       80,655  
Federal and state income tax
    10,394       4,236       1,087             12,598       28,315  
Net income
    16,326       6,653       1,707       1,792       25,862       52,340  
Net income attributable to non-controlling interest
                            225       225  
Net income attributable to BOK Financial Corporation
  $ 16,326     $ 6,653     $ 1,707     $ 1,792     $ 25,637     $ 52,115  
                                                 
Average assets
  $ 10,381,632     $ 6,258,278     $ 3,092,574           $ 3,341,547     $ 23,074,031  


 
- 74 -

 

Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2009 is as follows (in thousands):

   
Commercial
   
Consumer
   
Wealth
Management
   
Tax-Equivalent Adjustment
   
Funds Management and Other
   
BOK
Financial
Consolidated
 
NIR (expense) from external sources
  $ 172,615     $ 25,199     $ 9,545     $ 3,897     $ 134,169     $ 345,425  
NIR (expense) from internal sources
    (25,950 )     46,108       13,326             (33,484 )      
                                                 
Total net interest revenue
    146,665       71,307       22,871       3,897       100,685       345,425  
                                                 
Other operating revenue
    67,261       94,917       79,829             3,716       245,723  
Operating expense
    110,032       126,388       84,327             29,440       350,187  
Provision for credit losses
    49,013       11,236       6,558             25,353       92,160  
Increase in fair value of mortgage
   service rights
    ­       9,820       ­                   9,820  
Gain (loss) on financial instruments,
   net
          (12,317 )                 19,651       7,334  
Gain (loss) on repossessed assets, net
    (1,125 )     166                   (238 )     (1,197 )
Income before taxes
    53,756       26,269       11,815       3,897       69,021       164,758  
Federal and state income tax
    20,911       10,219       4,596             21,427       57,153  
Net income
    32,845       16,050       7,219       3,897       47,594       107,605  
Net income attributable to non-controlling interest
                            458       458  
Net income attributable to BOK Financial Corporation
  $ 32,845     $ 16,050     $ 7,219     $ 3,897     $ 47,136     $ 107,147  
                                                 
Average assets
  $ 10,566,763     $ 6,150,752     $ 3,049,610           $ 3,130,607     $ 22,897,732  



 
- 75 -

 

 (12) Fair Value Measurements

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of June 30, 2010 (dollars in thousands):

         
Range of
   
Average
         
Estimated
 
   
Carrying
   
Contractual
   
Re-pricing
   
Discount
   
Fair
 
   
Value
   
Yields
   
(in years)
   
Rate
   
Value
 
Cash and cash equivalents
  $ 852,526                       $ 852,526  
Trading securities
    62,159                         62,159  
Investment securities:
                                 
Municipal and other tax-exempt
    221,702                         227,301  
Other debt securities
    131,575                         136,585  
      353,277                         363,886  
Available for sale securities:
                                 
Municipal and other tax-exempt
    66,439                         66,439  
U.S. agency residential mortgage-backed securities
     8,223,719                          8,223,719  
Private issue residential mortgage-backed securities
     735,516                          735,516  
Other debt securities
    13,064                         13,064  
Federal Reserve Bank stock
    32,844                         32,844  
Federal Home Loan Bank stock
    88,048                         88,048  
Perpetual preferred stock
    19,881                         19,881  
Equity securities and mutual funds
    47,209                         47,209  
      9,226,720                         9,226,720  
                                   
Mortgage trading securities
    534,641                         534,641  
Residential mortgage loans held for sale
    227,574                         227,574  
Loans:
                                       
Commercial
    6,011,528       0.25 – 18.00 %     0.54       0.72 – 4.61 %     5,915,895  
Commercial real estate
    2,340,909       0.38 – 18.00       1.08       0.30 – 3.91       2,291,533  
Residential mortgage
    1,834,246       0.38 – 18.00       3.12       1.16 – 4.17       1,912,579  
Consumer
    696,034       0.38 – 21.00       0.90       1.92 – 4.16       704,498  
Total loans
    10,882,717                               10,824,505  
                                         
Reserve for loan losses
    (299,489 )                              
Net loans
    10,583,228                               10,824,505  
Mortgage servicing rights
    98,942                               98,942  
Derivative instruments with positive fair value, net of cash margin
    334,576                               334,576  
Other assets – private equity funds
    23,834                               23,834  
Deposits with no stated maturity
    12,414,412                               12,414,412  
Time deposits
    3,673,088       0.01 – 9.64       1.54       1.05 – 1.54       3,158,578  
Other borrowings
    3,970,770       0.14 – 6.58       0.37       0.18 – 2.81       3,834,960  
Subordinated debentures
    398,617       5.19 – 5.82       2.60       3.88       415,161  
Derivative instruments with negative fair value, net of cash margin
    299,851                               299,851  

Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown above may not represent values at which the respective financial instruments could be sold individually or in the aggregate.

 
The following methods and assumptions were used in estimating the fair value of these financial instruments:
 
 
Cash and Cash Equivalents
 
The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets’ fair values.

 
- 76 -

 

 
Securities
 
The fair values of securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities prepayment speeds and loss severities.  Fair values for a portion of the securities portfolio are based on significant unobservable inputs, including projected cash flows discounted as rates indicated by comparison to securities with similar credit and liquidity risk.

Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that use significant other observable market inputs.
 
Residential Mortgage Loans Held for Sale
 
Residential mortgage loans held for sale are carried on the balance sheet at fair value.  The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments.
 
Loans
 
The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings. The fair values of loans were estimated to approximate their discounted cash flows less loan loss reserves allocated to these loans of $280 million at June 30, 2010.

 
Other Assets – Private Equity Funds
 
The fair value of the portfolio investments of the Company’s two private equity funds are based upon net asset value reported by the underlying funds, as adjusted by the general partner when  necessary to represent the price that would be received to sell the assets.  Private equity fund assets are long-term, illiquid investments.  No secondary market exists for these assets.  They may only be realized through cash distributions from the underlying funds.

 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions.  Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in this table.

 
Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments.
 
Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at June 30, 2010.


 
- 77 -

 

Assets and liabilities recorded at fair value in the financial statements on a recurring and non-recurring basis are grouped into three broad levels as follows:

Quoted Prices in active Markets for Identical Instruments – Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.

Significant Other Observable Inputs – Fair value is based on significant other observable inputs are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and are based on one or more of the following:

·  
Quoted prices for similar, but not identical, assets or liabilities in active markets;
·  
Quoted prices for identical or similar assets or liabilities in inactive markets;
·  
Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;
·  
Other inputs derived from or corroborated by observable market inputs.

Significant Unobservable Inputs – Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values.  Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers’ quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values.  Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values.  Based on this evaluation, we determined that the results represent prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market.

Fair Value of Financial Instruments Measured on a Recurring Basis

The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of June 30, 2010 (in thousands):

   
Total
   
Quoted Prices in Active Markets for Identical Instruments
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
Assets:
                       
Trading securities
  $ 62,159     $ 4,030     $ 58,129     $  
Available for sale securities:
                               
   Municipal and other tax-exempt
    66,439               26,613       39,826  
   U.S. agency residential mortgage-backed securities
    8,223,719               8,223,719          
   Private issue residential mortgage-backed securities
    735,516               735,516          
   Other debt securities
    13,064               29       13,035  
   Federal Reserve Bank stock
    32,844               32,844          
   Federal Home Loan Bank stock
    88,048               88,048          
   Perpetual preferred stock
    19,881               19,881          
   Equity securities and mutual funds
    47,209       22,728       24,481          
      9,226,720       22,728       9,151,131       52,861  
                                 
Mortgage trading securities
    534,641               534,641          
Residential mortgage loans held for sale
    227,574               227,574          
Mortgage servicing rights
    98,942                       98,942 (1)
Derivative contracts, net of cash margin (2)
    334,576       16,991       317,585          
Other assets – private equity funds
    23,834                       23,834  
                                 
Liabilities:
                               
Certificates of deposit
    27,957               27,957          
Derivative contracts, net of cash margin (2)
    299,851               299,851          

(1)  
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
(2)  
See Note 3 for detail of fair value of derivative contracts by contract type.

 
- 78 -

 

 
 
The fair value of certain municipal and other debt securities classified as trading, investment or available for sale may be based on significant unobservable inputs.  These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt.  Discount rates are primarily based on reference to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally recognized rating agencies adjusted for a lack of trading volume.  Taxable securities rated investment grade by all nationally recognized rating agencies are generally valued to yield a range of 1.85% to 3.29%.  As of June 30, 2010, average yields on comparable short-term taxable securities are generally less than 1%.  Tax-exempt securities rated investment grade by all nationally recognized rating agencies are generally valued to yield a range of 1.10% to 1.40%, which represents a spread of 70 to 80 basis points over average yields of comparable securities as of June 30, 2010.  Approximately $9.6 million of our municipal and other tax-exempt securities are rated below investment grade by at least one of the three nationally recognized rating agencies.  The fair value of these securities was determined based on yields ranging from 4.54% to 8.30%.  These yields were determined using a spread of 425 basis points over comparable municipal securities of varying durations as of June 30, 2010.  All of these securities are currently performing in accordance with their respective contractual terms.

The following represents the changes for the three months ended June 30, 2010 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

         
Available for Sale Securities
       
   
Trading Securities
   
Municipal and other tax-exempt
   
Other debt securities
   
Other assets – private equity funds
 
                         
Balance at March 31, 2010
  $     $ 38,004     $ 17,150     $ 22,825  
Transfer from trading to available for sale
    (1,964 )     1,964              
Purchases, sales, issuances and settlements, net
    1,975       (200 )     (4,250 )     663  
Gain (loss) recognized in earnings (1)
    (11 )                 346  
Other comprehensive (loss)
          58       135        
Balance June 30, 2010
  $     $ 39,826     $ 13,035     $ 23,834  
(1) Loss on trading securities included in Brokerage and Trading Revenue.  Gain on private equity funds included in Gain on Other Assets.

The following represents the changes for the six months ended June 30, 2010 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
         
Available for Sale Securities
       
   
Trading Securities
   
Municipal and other tax-exempt
   
Other debt securities
   
Other assets – private equity funds
 
                         
Balance at December 31, 2009
  $ 9,800     $ 36,598     $ 17,116     $ 22,917  
Transfer from trading to available for sale
    (4,820 )     4,720       100        
Purchases, sales, issuances and settlements, net
    (4,900 )     (667 )     (4,300 )     1  
Gain (loss) recognized in earnings (1)
    (80 )                 916  
Other comprehensive (loss)
          (825 )     119        
Balance June 30, 2010
  $     $ 39,826     $ 13,035     $ 23,834  
(1) Loss on trading securities included in Brokerage and Trading Revenue.  Gain on private equity funds included in Gain on Other Assets.

Substantially all trading securities with fair values based on significant unobservable inputs were transferred to available for sale based on sales limitations and banking regulations.  There were no transfers from quoted prices in active markets for identical instruments to significant other observable inputs during the first or second quarter of 2010.

Fair Value of Financial Instruments Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include pension plan assets, which are based on quoted prices in active markets for identical instruments, collateral for certain impaired loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets.  In addition, goodwill impairment is evaluated based on the fair value of the Company’s reporting units.


 
- 79 -

 

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period.  The carrying value represents only those assets adjusted to fair value during the period ended June 30, 2010:

   
Carrying Value at June 30, 2010
       
   
Quoted Prices
in Active Markets for Identical Instruments
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
   
Fair Value
Adjustments
for the Three Month Period Ended
June 30, 2010
 
Impaired loans
  $     $ 55,893     $     $ 28,243  
Real estate and other repossessed assets
          28,778       6,736       11,623  
 
 
The fair value of collateral-dependent impaired loans and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals.  Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data.  Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs.  Fair value adjustments of impaired loans are charged against the allowance for loan losses.  Fair value adjustments of real estate and other repossessed assets are charged against operating expenses as net gains, losses and operating expenses of repossessed assets.

Fair Value Election

Certain certificates of deposit were designated as carried at fair value.  This determination is made based on the Company’s intent to convert these certificates from fixed interest rates to variable interest rates based on LIBOR with interest rate swaps that have not been designated as hedging instruments.  The fair value election for these liabilities better represents the economic effect of these instruments on the Company.  At June 30, 2010, the fair value and contractual principal amount of these certificates was $28 million and $27 million, respectively.  Change in the fair value of these certificates of deposit resulted in an unrealized gain during the three and six months ended June 30, 2010 of $201 thousand and $444 thousand, respectively, which is included in Gain (Loss) on Derivatives, net on the Consolidated Statement of Earnings.

As more fully disclosed in Note 2 and Note 6 to the Consolidated Financial Statements, the Company has elected to carry certain mortgage-backed securities which have been designated as economic hedges against changes in the fair value of mortgage servicing rights and residential mortgage loans held for sale at fair value.  Changes in the fair value of these financial instruments are recognized in earnings.

 
 (13) Federal and State Income Taxes

The reconciliations of income (loss) attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands):

   
Three Months Ended June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Amount:
                       
Federal statutory tax
  $ 34,160     $ 28,229     $ 65,879     $ 57,665  
Tax exempt revenue
    (1,388 )     (1,125 )     (2,793 )     (2,250 )
Effect of state income taxes, net of federal benefit
    2,003        2,091       3,718        4,615  
Utilization of tax credits
    (1,712 )     (378 )     (3,040 )     (757 )
Bank-owned life insurance
    (877 )     (789 )     (1,742 )     (1,578 )
Other, net
    (144 )     287       303       (542 )
Total
  $ 32,042     $ 28,315     $ 62,325     $ 57,153  


 
- 80 -

 


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Percent of pretax income:
                       
Federal statutory tax
    35 %     35 %     35 %     35 %
Tax exempt revenue
    (1 )     (1 )     (1 )     (1 )
Effect of state income taxes, net of federal benefit
    2       3       2       3  
Utilization of tax credits
    (2 )     (1 )     (2 )     (1 )
Bank-owned life insurance
    (1 )     (1 )     (1 )     (1 )
Other, net
                       
Total
    33 %     35 %     33 %     35 %

(14) Financial Instruments with Off-Balance Sheet Risk

BOK Financial is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to manage interest rate risk. Those financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in BOK Financial’s Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional amount of those instruments.

As of June 30, 2010, outstanding commitments and letters of credit were as follows (in thousands):

Commitments to extend credit
  $ 4,898,045  
Standby letters of credit
    552,037  
Commercial letters of credit
    5,878  

The Company also has off-balance sheet credit risk for residential mortgage loans sold with full or partial recourse.  The principal balance of residential mortgage loans sold subject to recourse obligations totaled $311 million at June 30, 2010, $331 million at December 31, 2009 and $346 million at June 30, 2009.  The separate reserve for these off-balance sheet commitments was $14 million at June 30, 2010, $14 million at December 31, 2009 and $11 million at June 30, 2009.  Approximately 5% of the loans sold with recourse with an outstanding principal balance of $16 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5% with an outstanding balance of $16 million were past due 30 to 89 days.  The provision for credit losses on loans sold with recourse is included in mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the reserve for losses on loans sold with recourse is summarized as follows (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Beginning balance
  $ 13,781     $ 9,283     $ $13,781     $ $8,767  
Provision for recourse losses
    1,568       3,289       2,867       5,109  
Loans charged off, net
    (1,568 )     (1,779 )     (2,867 )     (3,083 )
Ending balance
  $ 13,781     $ 10,793     $ $13,781     $ $10,793  


(15) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on June 30, 2010 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q.  No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


 
- 81 -

 

Six-Month Financial Summary – Unaudited

Consolidated Daily Average Balances,
Average Yields and Rates

(Dollars in Thousands Except Per Share Data)

   
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
 
                                     
   
Average
   
Revenue/
   
Yield/
   
Average
   
Revenue/
   
Yield/
 
   
Balance
   
Expense1
   
Rate
   
Balance
   
Expense1
   
Rate
 
                                     
Assets
                                   
Taxable securities3
  $ 9,290,114     $ 164,072       3.64 %   $ 7,340,756     $ 164,715       4.69 %
Tax-exempt securities3
    295,570       7,450       5.08       268,935       8,182       6.14  
Total securities3
    9,585,684       171,522       3.69       7,609,691       172,897       4.75  
Trading securities
    64,817       1,453       4.52       112,464       2,002       3.59  
Funds sold and resell agreements
    27,543       16       0.12       39,929       44       0.22  
Residential mortgage loans held for sale
    160,574       3,924       4.93       233,800       5,593       4.82  
Loans2
    11,078,796       264,795       4.82       12,602,894       287,273       4.60  
Less reserve for loan losses
    310,904       -       -       269,490       -       -  
Loans, net of reserve
    10,767,892       264,795       4.96       12,333,404       287,273       4.70  
Total earning assets3
    20,606,510       441,710       4.37       20,329,288       467,809       4.70  
Cash and other assets
    2,971,527                       2,568,444                  
Total assets
  $ 23,578,037                     $ 22,897,732                  
                                                 
Liabilities and Shareholders’ Equity
                                               
Transaction deposits
  $ 8,126,416     $ 20,179       0.50 %   $ 6,733,076     $ 28,779       0.86 %
Savings deposits
    177,720       363       0.41       163,698       213       0.26  
Time deposits
    3,736,535       33,367       1.80       5,169,267       68,038       2.65  
Total interest-bearing deposits
    12,040,671       53,909       0.90       12,066,041       97,030       1.62  
Funds purchased and repurchase agreements
    2,532,953       4,276       0.34       2,438,851       4,820       0.40  
Other borrowings
    1,932,868       2,994       0.31       2,054,759       5,439       0.53  
Subordinated debentures
    398,578       11,101       5.62       398,440       11,198       5.67  
Total interest-bearing liabilities
    16,905,070       72,280       0.86       16,958,091       118,487       1.41  
Demand deposits
    3,573,692                       3,024,925                  
Other liabilities
    760,374                       953,375                  
Shareholders’ equity
    2,338,901                       1,961,341                  
Total liabilities and shareholders’ equity
  $ 23,578,037                     $ 22,897,732                  
                                                 
Tax-equivalent Net Interest Revenue3
          $ 369,430       3.50 %           $ 349,322       3.29 %
Tax-equivalent Net Interest Revenue to Earning Assets3
                    3.65                       3.51  
Less tax-equivalent adjustment1
            4,743                       3,897          
Net Interest Revenue
            364,687                       345,425          
Provision for credit losses
            78,140                       92,160          
Other operating revenue
            271,322                       253,057          
Other operating expense
            369,644                       341,564          
Income before taxes
            188,225                       164,758          
Federal and state income tax
            62,325                       57,153          
Net income
            125,900                       107,605          
Net income attributable to non-controlling interest
            2,245                       458          
Net income attributable to BOK Financial Corp.
          $ 123,655                     $ 107,147          
                                                 
Earnings Per Average Common Share Equivalent:
                                               
Net income:
                                               
Basic
          $ 1.82                     $ 1.59          
Diluted
          $ 1.81                     $ 1.58          
1
Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes.
2
The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income.
3
Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.


 
- 82 -

 

Quarterly Financial Summary – Unaudited

Consolidated Daily Average Balances,
Average Yields and Rates

(Dollars in Thousands Except Per Share Data)

   
Three Months Ended
 
   
June 30, 2010
   
March 31, 2010
 
                                     
   
Average
   
Revenue/
   
Yield/
   
Average
   
Revenue/
   
Yield/
 
   
Balance
   
Expense1
   
Rate
   
Balance
   
Expense1
   
Rate
 
                                     
Assets
                                   
Taxable securities3
  $ 9,366,703     $ 81,460       3.56 %   $ 9,212,677     $ 82,612       3.73 %
Tax-exempt securities3
    296,282       3,614       4.89       294,849       3,837       5.28  
Total securities3
    9,662,985       85,074       3.60       9,507,526       86,448       3.78  
Trading securities
    58,722       661       4.51       70,979       792       4.53  
Funds sold and resell agreements
    22,776       8       0.14       32,363       8       0.10  
Residential mortgage loans held for sale
    183,489       2,177       4.76       137,404       1,747       5.16  
Loans2
    10,971,466       132,004       4.83       11,187,320       132,791       4.81  
Less reserve for loan losses
    312,595                   309,194              
Loans, net of reserve
    10,658,871       132,004       4.97       10,878,126       132,791       4.95  
Total earning assets3
    20,586,843       219,924       4.33       20,626,398       221,786       4.41  
Cash and other assets
    2,857,964                       3,086,349                  
Total assets
  $ 23,444,807                     $ 23,712,747                  
                                                 
Liabilities and Shareholders’ Equity
                                               
Transaction deposits
  $ 8,287,296       10,044       0.49     $ 7,963,752     $ 10,135       0.52  
Savings deposits
    184,376       185       0.40       170,990       178       0.42  
Time deposits
    3,701,167       16,063       1.74       3,772,295       17,304       1.86  
Total interest-bearing deposits
    12,172,839       26,292       0.87       11,907,037       27,617       0.94  
Funds purchased and repurchase agreements
    2,491,084       2,254       0.36       2,575,286       2,022       0.32  
Other borrowings
    1,619,745       1,403       0.35       2,249,470       1,591       0.29  
Subordinated debentures
    398,598       5,535       5.57       398,559       5,566       5.66  
Total interest-bearing liabilities
    16,682,266       35,484       0.85       17,130,352       36,796       0.87  
Demand deposits
    3,660,910                       3,485,504                  
Other liabilities
    722,902                       798,263                  
Shareholders’ equity
    2,378,729                       2,298,628                  
Total liabilities and shareholders’ equity
  $ 23,444,807                     $ 23,712,747                  
                                                 
Tax-equivalent Net Interest Revenue3
          $ 184,440       3.48 %           $ 184,990       3.54 %
Tax-equivalent Net Interest Revenue to Earning Assets3
                    3.63                       3.68  
Less tax-equivalent adjustment1
            2,327                       2,416          
Net Interest Revenue
            182,113                       182,574          
Provision for credit losses
            36,040                       42,100          
Other operating revenue
            157,439                       113,883          
Other operating expense
            205,912                       163,732          
Income before taxes
            97,600                       90,625          
Federal and state income tax
            32,042                       30,283          
Net income
            65,558                       60,342          
Net income attributable to non-controlling interest
            2,036                       209          
Net income attributable to BOK Financial Corp.
          $ 63,522                     $ 60,133          
                                                 
Earnings Per Average Common Share Equivalent:
                                               
Net income:
                                               
Basic
          $ 0.93                     $ 0.88          
Diluted
          $ 0.93                     $ 0.88          
1
Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes.
2
The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income.
3
Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.

 
- 83 -

 







Three Months Ended
 
December 31, 2009
   
September 30, 2009
   
June 30, 2009
 
                                                 
Average
 
Revenue/
   
Yield/
   
Average
   
Revenue/
   
Yield/
   
Average
   
Revenue/
   
Yield/
 
Balance
 
Expense1
   
Rate
   
Balance
   
Expense1
   
Rate
   
Balance
   
Expense1
   
Rate
 
                                                 
                                                 
$  8,875,417
  $ 82,392       3.83 %   $ 8,012,380     $ 81,890       4.18 %   $ 7,594,355     $ 80,711       4.50 %
286,550
    3,726       5.16       273,432       3,468       5.03       285,078       4,044       5.69  
9,161,967
    86,118       3.87       8,285,812       85,358       4.21       7,879,433       84,755       4.54  
68,027
    927       5.41       64,763       771       4.72       112,960       983       3.49  
30,358
    16       0.21       67,032       18       0.11       29,277       14       0.19  
194,760
    2,311       4.71       176,403       2,198       4.94       286,077       3,215       4.51  
11,492,696
    137,235       4.74       11,887,418       139,883       4.67       12,403,050       143,510       4.64  
298,157
                281,289                   273,335              
11,194,539
    137,235       4.86       11,606,129       139,883       4.78       12,129,715       143,510       4.75  
20,649,651
    226,607       4.42       20,200,139       228,228       4.54       20,437,462       232,477       4.65  
3,046,083
                    2,850,395                       2,636,569                  
$23,695,734
                  $ 23,050,534                     $ 23,074,031                  
                                                                 
                                                                 
$  7,734,678
  $ 11,092       0.57 %   $ 7,162,477     $ 11,736       0.65 %   $ 6,854,003     $ 13,362       0.78 %
167,572
    199       0.47       167,677       203       0.48       167,813       104       0.25  
4,002,337
    19,700       1.95       4,404,854       24,401       2.20       5,123,947       31,637       2.48  
11,904,587
    30,991       1.03       11,735,008       36,340       1.23       12,145,763       45,103       1.49  
2,173,476
    1,658       0.30       2,284,985       1,817       0.32       2,316,990       1,995       0.35  
2,380,938
    1,742       0.29       2,173,103       2,070       0.38       1,951,699       2,375       0.49  
398,522
    5,542       5.52       398,484       5,558       5.53       398,456       5,632       5.67  
16,857,523
    39,933       0.94       16,591,580       45,785       1.09       16,812,908       55,105       1.31  
3,666,663
                    3,392,578                       3,183,338                  
924,803
                    931,406                       1,071,121                  
2,246,745
                    2,134,970                       2,006,664                  
$ 23,695,734
                  $ 23,050,534                     $ 23,074,031                  
                                                                 
    $ 186,674       3.48 %           $ 182,443       3.45 %           $ 177,372       3.34 %
              3.64                       3.63                       3.55  
      2,196                       1,982                       1,792          
      184,478                       180,461                       175,580          
      48,620                       55,120                       47,120          
      108,163                       131,770                       127,965          
      176,437                       178,732                       175,770          
      67,584                       78,379                       80,655          
      24,780                       24,772                       28,315          
      42,804                       53,607                       52,340          
      33                       2,947                       225          
    $ 42,771                     $ 50,660                     $ 52,115          
                                                                 
                                                                 
                                                                 
    $ 0.63                     $ 0.75                     $ 0.77          
    $ 0.63                     $ 0.75                     $ 0.77          


 
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Quarterly Earnings Trends -- Unaudited
     
(In thousands, except share and per share data)
     
   
Three Months Ended
 
   
June 30.
2010
   
March 31,
2010
   
Dec. 31,
2009
   
Sept. 30,
2009
   
June 30,
2009
 
Interest revenue
  $ 217,597     $ 219,370     $ 224,411     $ 226,246     $ 230,685  
Interest expense
    35,484       36,796       39,933       45,785       55,105  
Net interest revenue
    182,113       182,574       184,478       180,461       175,580  
Provision for credit losses
    36,040       42,100       48,620       55,120       47,120  
Net interest revenue after provision for credit losses
    146,073       140,474       135,858       125,341       128,460  
Other operating revenue
                                       
Brokerage and trading revenue
    24,754       21,035       20,240       24,944       21,794  
Transaction card revenue
    28,263       25,687       26,292       26,264       27,533  
Trust fees and commissions
    17,737       16,320       16,492       16,315       16,860  
Deposit service charges and fees
    28,797       26,792       29,501       30,464       28,421  
Mortgage banking revenue
    18,335       14,871       13,403       13,197       19,882  
Bank-owned life insurance
    2,908       2,972       2,870       2,634       2,418  
Margin asset fees
    69       36       50       51       68  
Other revenue
    7,305       7,602       7,101       6,087       6,124  
Total fees and commissions
    128,168       115,315       115,949       119,956       123,100  
Gain (loss) on other  assets, net
    1,545       (1,390 )     (205 )     3,223       973  
Gain (loss) on derivatives, net
    7,272       (341 )     (370 )     (294 )     (1,037 )
Gain on securities, net
    23,100       4,524       7,277       12,266       6,471  
Total other-than-temporary impairment losses
    (10,959 )     (9,708 )     (67,390 )     (6,133 )     (1,263 )
Portion of loss recognized in other comprehensive income
    (8,313 )     (5,483 )     (52,902 )     (2,752 )     279  
Net impairment losses recognized in earnings
    (2,646 )     (4,225 )     (14,488 )     (3,381 )     (1,542 )
Total other operating revenue
    157,439       113,883       108,163       131,770       127,965  
Other operating expense
                                       
Personnel
    97,054       96,824       93,687       98,012       96,191  
Business promotion
    4,945       3,978       5,758       4,827       4,569  
Professional fees and services
    6,668       6,401       8,813       7,555       7,363  
Net occupancy and equipment
    15,691       15,511       17,600       15,884       15,973  
Insurance
    5,596       6,533       6,412       6,092       5,898  
FDIC special assessment
                            11,773  
Data processing and communications
    21,940       20,309       21,121       20,413       20,452  
Printing, postage and supplies
    3,525       3,322       3,601       3,716       4,072  
Net losses and operating expenses of repossessed assets
    13,067       7,220       5,101       3,497       996  
Amortization of intangible assets
    1,323       1,324       1,912       1,686       1,686  
Mortgage banking costs
    10,380       9,267       11,436       8,065       9,336  
Change in fair value of mortgage servicing rights
    19,458       (13,932 )     (5,285 )     2,981       (7,865 )
Other expense
    6,265       6,975       6,281       6,004       5,326  
Total other operating expense
    205,912       163,732       176,437       178,732       175,770  
Income before taxes
    97,600       90,625       67,584       78,379       80,655  
Federal and state income tax
    32,042       30,283       24,780       24,772       28,315  
Net income
    65,558       60,342       42,804       53,607       52,340  
Net income attributable to non-controlling interest
    2,036       209       33       2,947       225  
Net income attributable to BOK Financial Corp.
  $ 63,522     $ 60,133     $ 42,771     $ 50,660     $ 52,115  
                                         
Earnings per share:
                                       
Basic
  $ 0.93     $ 0.88     $ 0.63     $ 0.75     $ 0.77  
Diluted
  $ 0.93     $ 0.88     $ 0.63     $ 0.75     $ 0.77  
Average shares used in computation:
                                       
Basic
    67,605,807       67,592,315       67,446,326       67,392,059       67,344,577  
Diluted
    67,880,587       67,790,049       67,600,344       67,513,700       67,448,029  


 
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PART II. Other Information

 
Item 1. Legal Proceedings
 
 
See discussion of legal proceedings at footnote 8 to the consolidated financial statements.
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended June 30, 2010.
 
 
 
Period
 
Total Number of Shares Purchased (2)
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
   
Maximum Number of Shares that May Yet Be Purchased Under the Plans
 
April 1, 2010 to  April 30, 2010
    17,562     $ 55.50             1,215,927  
May 1, 2010 to    May 31, 2010
    7,243     $ 55.20             1,215,927  
June 1, 2010 to    June 30, 2010
                      1,215,927  
Total
    24,805                        
 
(1)  
On April 26, 2005, the Company’s board of directors authorizing the Company to repurchase up to two million shares of the Company’s common stock.  As of June 30, 2010, the Company had repurchased 784,073 shares under this plan.
 
 
(2)  
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.
 
 
 
Item 6. Exhibits

31.1  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002
31.2  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 

Items 1A, 3, 4 and 5 are not applicable and have been omitted.

 
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Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BOK FINANCIAL CORPORATION
 (Registrant)



Date:         August 2, 2010                                                         



/s/ Steven E. Nell                                                                   
Steven E. Nell
Executive Vice President and
Chief Financial Officer



/s/ John C. Morrow                                                 
John C. Morrow
Senior Vice President and
Chief Accounting Officer


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